UniSuper benefit warning sparks demand for full disclosure

Super funds face hard times, as indicated above by a slide last week on Spain’s stock market. AAP/EAP/Gustavo Cuevas.

UniSuper’s admission that a superannuation scheme formerly guaranteed by employers, the universities, is underfunded has sparked angry calls for full financial disclosure to be mandatory, and raised questions about how UniSuper represented the underfunded scheme.

Deakin University Professor of Accounting, Graeme Wines, said that he was “incensed” by the lack of detailed information that members receive about declines in the value of investments - a situation brought into stark relief when UniSuper issued an early warning last week that its defined benefit division did not have the money to meet its future obligations. UniSuper, which has not released less information than required under superannuation legislation, also released a statement saying that any decision about cutting member benefits would not be taken for some time - “most likely [in] the first quarter of 2013”.

It was wrong that superannuation funds were not required to provide full financial disclosure, said Professor Wines, who is one of the more than 80,000 UniSuper members to have opted for the defined benefit scheme, in which post-retirement benefits are a specified multiple of salary and length of service.

“If you went to your financial adviser to ask about investing in BHP Billiton, they would be able to get the full financial statements, but investing in shares on the stock market is a voluntary decision, whereas superannuation is compulsory - so you there is an even greater argument that full financial statements should be made available. There are various accounting standards being developed specifically for superannuation funds but currently there are no legislative provisions to require super funds to release full, audited financial statements to members.”

A recent report from CPA Australia highlighted accountants’ widespread concern about the relative lack of financial reporting and transparency in an industry managing more than $1.3 trillion in funds. The report, Super Reporting: do you get the picture?, opens with a quote from last year’s Cooper Review of the industry:

The Australian superannuation system is characterised by a lack of transparency, comparability and, consequently, accountability. There is no standardised methodology for calculating and disclosing relevant fund or investment option information. Members often rely inappropriately on historical investment return data which gives no information about the risk attaching to those returns.

Three quarters of CPA members polled felt “there was a lack of transparency around costs and underlying asset investments, and that reporting should be of the same standard as listed entities.”

In terms of UniSuper, Dr Michael Rafferty of the University of Sydney’s Workplace Research Centre, said that there were also questions about how transparent the university-owned fund has been about the lack of university-guarantees to top up the scheme should it be underfunded - a provision many members felt was the hallmark of a defined benefit scheme. “To me it came as much of a surprise to find this out,” Dr Rafferty said. A 2006 change to the Trust Deed removed a reference to calling upon the universities to compensate for a shortfall, instead leaving a reduction in member benefits as the sole outcome. This would have come as a surprise to many of the 80,000 members of the scheme, Dr Rafferty said.

“When they made this change back in 2006 you’d have to have been looking really hard [to notice], so the issue of disclosure is not going to to go away. There’s an open question about how much disclosure was made at the time and until very recently people were being enrolled, and I don’t think they would have had any idea that even though it was called a defined benefits scheme. As UniSuper say, it’s only defined because there’s a formula defining it,” Dr Rafferty said.

The National Tertiary Education Union has issued a statement saying that by having originally required a unanimous agreement to top up the fund by the more than 35 universities and higher education providers that make up the shareholders of UniSuper’s trustee company, “the universities acted to make the original employer guarantee unenforceable. This placed the Board and the Consultative Committee over a barrel but in amending the Trust Deed it is clear that there was insufficient attention was given to the more important question of what new options might be included in the Trust Deed to meet any potential shortfall.”

Dr Rafferty said that what has emerged about the scheme raises a “whole bunch of governance and disclosure issues. The beneficiary - the member - is wearing all the risk, and I don’t think that’s really what a defined benefit scheme’s about, and I don’t think that adequate disclosure was made that this was what people were now faced with.” He also raised the question of fairness to those who entered the scheme before the 2006 change. “You could argue whether or not it was fair that people who were in the scheme before 2006 and honestly thought they were on a promise [about employer top-ups] could just have that promise broken without going through quite a serious consulting process.”

Professor Dimity Kingsford-Smith of the University of New South Wales’ Law Faculty, said that universities are “chronically and seriously underfunded” and simply could not allow themselves to be liable for plunges in the market “they do not have reserves and revenue to pay with”, but the question remained of what manner of fund UniSuper members believed they were entering when signing on for the defined benefits scheme. “It’s a small question with big consequences: what sort of fund was it really? And what was it represented to be?”

“Defined benefit funds are meant to keep the risk with the employer and not to put the risk on the member. This wasn’t just saying your fund’s gone down a per cent or we’re winding back your insurance benefit, it was actually saying wwe’re not going to have any more the very essence of the kind of fund you thought you were in,” Professor Kingsford-Smith said.

However, on the question of full financial disclosure, Professor Kingsford-Smith said such information might remain largely undigested. “One of the reasons why big companies who are listed release so much information is because, at least for the top 200 companies, there is an industry of financial analysts out there. They read all that disclosure and they are educated and trained to make sense of it. Most individuals who get some part of that information in a prospectus - when they’re about to buy - or in an annual report - when they’ve become an investor - don’t usually read the material very closely,” she said.

The research houses feed their findings about companies listed on the stock exchange to financial advisors, Professor Kingsford-Smith said, but “there isn’t so much research analysis in the superannuation area as there is in the company securities area … so a financial adviser wouldn’t have as much depth of analysis to go on in advising a switch from one super fund to another as they would have in advising a switch between one corporate security and another.”

UniSuper did not respond to a request for an interview.

Disclosure: Matthew Thompson is a UniSuper member, but not in the fund’s defined benefit division.

Are you a member of UniSuper’s defined benefit scheme? Did you realise that it was not guaranteed by the employer, or did the warning surprise you? Comments welcome below.