AUSTRALIA - Superannuation funds will have to pay closer attention to their decision-making process and board composition in the wake of the Cooper Review recommendations, Russell Investments warns.
In a survey launched at its Australian Investment Summit yesterday, Russell said responsibility for critical tasks was not clearly delineated, with trustees, investment sub-committees, in-house teams and external managers all playing a part in some funds.
The survey of 40 superannuation funds, 12 of which were under A$500m ($454m) and 28 of which were over A$500m in value, found asset allocation falls to trustees in 80% of funds and to the sub-committee in 38%. Trustees take portfolio decisions in 60% of funds while the sub-committee does so in 43% of funds.
"Given the lack of rigorous evidence on current governance practices, particularly around the investment process, we undertook research to see what areas needed improvement as the scrutiny on funds increases," said Keith Knapman, director investment consulting, at Russell.
"The result shows not only a lack of delegation but a serious overlap in responsibility and potential lack of accountability. The investment committee is polite and inclusive which means it is not operating to the full extent of its power."
Knapman also pointed out the fiduciary role of a board is not defined and its lack of delegation wastes board time. "With funds becoming more complex, trustees need to spend more time on strategy and less time on implementation," he added.
Despite delegation and accountability issues, the survey found 86% of funds are confident overall their decision-making processes are suitable, with only 18% actively considering a change to their current decision-making process.
The survey also studied the composition of the trustee boards and whether members are being appropriately selected based on their skills and experience.
With Cooper recommending all funds comprise at least one independent director, Russell's survey found 53% of respondents would be looking to fill this role.
In 70% of funds between one and four board members have a finance or investment background, while only 20% have more than five members with finance or investment backgrounds and 5% have none. Most funds surveyed have between five and 10 trustees.
Meanwhile, 68% of funds have at least one employer-nominated member and 73% at least one employee-nominated member.
"While the survey shows good governance practices prevail on the whole, many boards are still ineffective in delegating to their investment committees. There is also some way to go in composing a board with an appropriate level of capability and independence," said Knapman.
"Many funds need a more corporate way of operating by adopting a skills-based approach to selecting directors and investment committees to ensure they have the appropriate level of experience around the table as opposed to the current focus on stakeholder representation.
"Governance is a key issue and on the whole funds are doing well, but improvements are needed in certain areas. Funds will have to manage this transition carefully."
The Next Generation Pensions Committee is on a mission to promote and encourage younger voices in the industry. Kim Kaveh looks at its key objectives
This week's top stories included an analysis finding the cost of equalising guaranteed minimum pensions in schemes could hit FTSE 100 profits by up to £15bn.
Employers whose dividend to deficit recovery contribution (DRCs) ratios fall outside the "normal range" should expect to see higher regulatory scrutiny, although no fixed ratio will be set.
Investment consultants and fiduciary managers should expect a final decision on the investigation into the market to be published by the end of the year, the competition watchdog says.