Super funds to blame for crisis, says expert

An international expert claims neglect of corporate governance by superannuation funds is at the core of the global financial crisis, something which is denied by an industry leader in Australia.

According to Colin Melvin, chief executive of UK advisory service Hermes Equity Ownership Services, the crisis is leading super funds to look towards increasing transparency.

"We are seeing more pension funds starting to engage with their portfolio companies, working to establish transparency and accountability," Melvin said. "This active involvement is essential if we are to emerge from this crisis and avoid another one."

Melvin said Hermes' role is to support trustees and "and connect pension funds with the companies they own".

"We are helping them in navigating very choppy waters and resisting the siren calls of short-term traders. Working together, pension funds can set the course to a new shore of accountability, responsibility and stability," he said.

However, Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia (ASFA), argued it is a governance issue in relation to the broader market and that structured products overseas may have caused breaches in fiduciary duty.

"The cause of the global financial crisis is certainly a governance issue, but it's not an issue of governance of pension funds," Vamos said. "It's a governance issue in terms of organisations lending money to people [who] can't afford it on assets that didn't go up in value."

Vamos added that structure products were developed, which were opaque and not properly regulated.

"You have superannuation trustees or pension trustees globally that have a fiduciary duty. They need to know they need to invest for the long term and they need to invest in a broad cross section of assets. I believe there have been some products developed that are opaque that maybe some funds, not in Australia but certainly overseas, have invested in," Vamos said.

"Basically, if you invest in a product and you really don't know the cost structure, the risk characteristics or the return of that, then you are potentially breaching your fiduciary duty," Vamos said. "In Australia, because of the amount of money in super funds, they don't invest in structured products because they don't need to.

"They have enough money to invest in debt products, credit products, infrastructure products directly."

Vamos was supportive of Australia's superannuation industry, highlighting Australia's resilience in the financial crisis.

"At the moment, one of the key reasons why Australia is not suffering as badly is because the superannuation industry invests heavily in the whole economy. People have to pay their [super guarantee contribution] ... money is coming into superannuation that must be invested," Vamos said. "So we are still investing in Australian businesses. Overseas there's no compulsion, so the money isn't there to invest."

She added that in Australia we are also benefited by the fact that we do not necessarily have to be a forced buyer or forced seller of our underlying assets.

Melvin will be visiting Australia in late March.