Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is The price of trust

It was first published on Thursday 16 August 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

There is one element of our superannuation system that money cannot buy – trust.

Despite successfully developing into an industry now responsible for the management of more than $1.4 trillion of Australians' retirement savings, super funds fundamentally rely on the confidence of their members to continue to operate.

It is not dissimilar to the banking system – the one thing all bankers fear is a run on deposits. The Australian banking system came through the crisis of confidence that was the global financial crisis with relatively good marks – but even with our banks in good shape, the federal government still had to step in at the height of the crisis with a deposit guarantee to ensure the loss of confidence overseas did not have a contagion effect here.

Super funds are different to banks but, if there is one lesson regulators learnt from the GFC, it is that when systemically important organisations get into difficulty it can cause unrest throughout the entire financial system – remember how the collapse of Lehmans and Bear Stearns sent shock waves through global markets?

Super funds have the responsibility to manage their members' retirement savings but because they now represent a significant sector of the Australian financial system it is even more important that they be managed to the highest possible standards because they are important to Australia's economic stability.

This week a relatively unheralded piece of legislation passed through the Parliament.

In effect the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 implements many of the changes proposed by the Super System Review.

A fundamental outcome of these new laws is that the Australian Prudential Regulation Authority (APRA) now has the power to set prudential standards that trustees of super funds have to comply with.

APRA – which is the organisation also charged with overseeing our banks and insurance companies – is already moving and has released drafts of 11 prudential standards for consultation ahead of their taking effect in July next year.

Trustees of super funds going forward will have to:

            1          Promote the financial interests of MySuper beneficiaries, in particular returns (after the deduction of fees, costs and taxes).

            2          Annually assess sufficiency of scale.

            3          Include in their investment strategy an investment return target and level of risk for MySuper members.

            4          Maintain and manage financial resources to cover operational risk.

The legislation fell short of requiring super fund boards to have an independent chair and a majority of independent directors, but for trustees the changes clearly mean the standards are being raised and the responsibilities increased considerably with the aim of increasing trust and transparency for fund members.

Certainly enshrining a focus on net returns, costs and risks in trustee duties is a positive move that hopefully over time will also lead to fund members having an improved understanding of their fund's overall performance and promote stronger competition between funds.

Increased regulation always comes with a cost but if these changes build confidence in the system and help put the best interests of members first, the price will be well worth paying.

And that concludes the column

The price of trust

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

To receive the column by email each week go to vanguard.com.au and register with Smart Investing.

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.