Pension Governance in Australia: An Anatomy and an Interpretation

Abstract

The Australian pension system is evolving, driven by changing regulation, financial innovation and changing political climates. This article offers a snapshot of its current trustee policies and practices and shows that industry funds and retail funds have different historical origins, leading to different governance practices. One example is the task of portfolio construction involving asset allocation and manager selection. Many retail trustees within commercial conglomerate structures have passed the portfolio construction task to related service providers, increasing services and fees for fund members, whereas the portfolio construction task is an integral part of the service provided by industry funds themselves. Another example is the negotiation of investment management fees. Industry funds and their trustees do not appear to have the same level of conflict of interest in negotiating best possible terms for investment management services for their funds. Unlike most industry funds, many retail funds have high recognition due to their associations with reputable brand-name conglomerates and due to their history of easy access by the general public for managed investment products. They offer a sense of stability and security that is attractive to many investors. The article concludes that all funds should have default options tied to a few low-cost, well-diversified portfolios.