Superannuation in Society: What are the Accountability Relationships and is there a Role for (Group)...

Superannuation in Society: What are the AccountabilityRelationships and is there a Role for (Group) Accounting?

Isabel Gordon

This paper outlines the unsettled nature of report-ing by superannuation funds to members/usersand highlights the lack of nexus between the

economics of the pension transaction and the accountingfor that transaction.1 Superannuation fund financialreporting occurs in a complex economic environmentwhere underlying structural relationships – economics,finance, law and information technology – intersect toestablish a (sustainable) superannuation system that isin the national interest. There is approximately $1.31trillion invested in superannuation assets in Australiaaccording to APRA’s latest figures (APRA Statisticsas at December 2011). This rivals the total marketcapitalisation of the Australian Securities Exchange(ASX) of $1.17 trillion at the same date (ASX Endof Month Values at December 2011). Like listedentities, superannuation funds access ‘other people’smoney’ (Plender 1981: 14). The resulting agencyrelationships create responsibilities and accountabilitiesfrom the agent (company management/plan trustees) tothe principals (shareholders/members). These account-ability relationships are formalised through myriadregulations (for example, the Corporations Act 2001and the Superannuation Industry (Supervision) Act 1993(SIS) and Regulations 1994).2 Accountability of largeinstitutions, including pension funds, is a perennialproblem, especially if their activities are shielded fromthe public gaze (Plender 1981: 9, 10).

The accounting regulations (including consolidationaccounting) for superannuation funds are in a stateof flux (see Australian Accounting Standards Board(AASB) Project Summary: Comprehensive Review of AAS25 Financial Reporting by Superannuation Plans 2010).In Australia, accountability to members in the formof financial reporting has remained largely unchangedsince the introduction of compulsory superannuationin 1992. Financial reporting by superannuation fundsin Australia has been controversial and hotly debated(Klumpes 1994; Gallery 1999; Brown 2010), and remainsso after more than two decades. Gallery (1999: 22)describes the first release of AAS 25 in August 1990 asbeing ‘amid a public brawl between the superannuationindustry and the accounting profession’. Ball (2008)

Superannuation fund reporting is a topical issue: it is in astate of flux and currently on the Australian AccountingStandards Board (AASB) work program for 2012, withthe release of ED 223 Superannuation Entities inDecember 2011. Issues under debate include uncertaintyregarding the users of superannuation financial reports,and the application of the principle of ‘transactionneutrality’ to accounting for corporate groups bysuperannuation entities. Accountability reporting bysuperannuation funds has remained largely unchangedsince the introduction of compulsory superannuation 20years ago. This paper describes the changing nature ofsuperannuation from a managerial gratuity to a type ofdeferred pay, and how accounting for superannuation islikely to increase in significance as it responds to theshifting economic nature of superannuation, especiallysince the global financial crisis. This paper uses basiccontent analysis to analyse member submissions to theAustralian Government’s Review into Governance,Efficiency, Structure and Operation of Australia’sSuperannuation System 2009, and submissions to theAASB’s consultation paper on consolidation accountingfor superannuation entities in 2007. Limitedcharacterisations of members as being not interested infinancial reporting are out of step with the underlyingnature of superannuation, and will likely change as theeconomic significance of superannuation increases in thefuture.

CorrespondenceIsabel Gordon, The University of Sydney. Tel: +61 2 93517013; email: isabel.gordon@sydney.edu.au

doi: 10.1111/j.1835-2561.2012.00169.x

142 Australian Accounting Review No. 61 Vol. 22 Issue 2 2012

I. Gordon Superannuation in Society: Accountability Relationships and Group Accounting

considers that the absence of a ‘solidly groundedworldview’ of the functioning of financial reporting inthe economy is a major threat to accounting. Relatedly,the lack of understanding of the economics of thepension transaction in Australia will likely thwart thesocial function of accounting in the superannuationcontext and, with it, the national objective of providingretirement monies for retirees.

Accountability issues being debated in Australiainclude first, uncertainty with respect to the userbase and purpose of superannuation reports andsecond, the application of the overarching IASB/AASBsupported principle of ‘transaction neutrality’ (that is,the same accounting treatments for like transactionsfor all reporting entities) to superannuation financialreporting for controlled entities. With respect to thefirst accountability issue of uncertainty regarding theuser base of superannuation reports, The Review 2009into Governance, Efficiency, Structure and Operation ofAustralia’s Superannuation System Phase 1 Governancein 2009 (The Review (Australian Government 2009))presents an opportunity to analyse the purpose(s)of superannuation fund reporting as identified bymembers, an opportunity not otherwise available asmembers are a disparate and diverse group who lackcommon representation. For example, the accountingprofession’s uncertainty with respect to the exact userbase of the superannuation fund’s general purposereports (see Preface to ED 179) and the subjugation ofthe stewardship function of accounting by the decision-usefulness function (Peasnell et al. 2009) highlightsthe apparent disconnect between the economics ofthe pension transaction and the accounting forthat transaction. From the point of view of theaccounting profession, the user base and purposeof superannuation fund reporting are outlined inED 179 Superannuation Plans and Approved DepositFunds and ED 223 Superannuation Entities. The statedobjective of ED 223 (para 1) is to provide decision-useful information to users in a superannuationcontext.

Referring to the second issue (of transactionneutrality), in 2007 the AASB issued Consultation Paperon the AASB’s Proposed Requirements in Relation tothe Consolidation of Subsidiaries by SuperannuationEntities (Consultation Paper (AASB 2007)) that discussesthe application of consolidation accounting as wellas the full (and modified) fair value accountingmodels for superannuation entities. Complex groupstructures dominate commerce (Hadden 1980: 271;Arthur et al. 2008: 7). Current accounting regulationsfor groups follow the general principle that thepresentation of consolidated statements is requiredwhen the parent controls another (subsidiary) entity(AASB 127 paras 4 and 9). Consistent with thisgeneral principle, the AASB had earlier overlooked

some practical issues and stated that superannuationfunds should consolidate subsidiaries from 1 January2005. Regulators, such as the Australian Securities andInvestment Commission (ASIC), endorse control asthe criterion for consolidation to ensure that usersof consolidated financial statements see the completerepresentation of the resources for which the reportingentity is responsible. In other words, the rationale ofpresenting consolidated financial statements for a groupis to embrace the economic substance of the investor-investee relationship so that the results of the parent andits controlled entities are portrayed as a single economicentity. In this way, the principle of transaction neutralitysupports accountability by increasing transparency of anentity’s group structure and business arrangements andassociated risks (for example, by spurring disclosures ofRelated Party Transactions (RPT)).

Superannuation entities use group structures, inparticular controlling interests in leveraged investmentvehicles (AASB 2010: 4) and management companies,but there is a dearth of publicly available data about thenature and extent of this. The principle of transactionneutrality would deem the control criterion as thebasis for the preparation of consolidated financialstatements as applicable to superannuation entities.However, the 2007 submissions to the ConsultationPaper from industry bodies mostly argued that, contraryto transaction neutrality, the peculiar nature of theinvestment activities of superannuation entities rendersconsolidation accounting inapposite as an accountingtechnique. Along similar lines, the IASB and the FASB(2010) tentatively extended an exception to ‘investmentcompanies’ not to consolidate entities they control butinstead to measure such investments at fair value throughthe profit and loss on the grounds that this informationis more decision useful than consolidated information.Further, the submissions to the Consultation Paper2007 suggest that users of superannuation fundreports are less able to process consolidated accountinginformation.

This paper discusses the economic role of super-annuation/pensions in Australia by highlighting theshifting nature of superannuation in Australia from amanagerial gratuity to an employee entitlement (that is,deferred pay) and with it, the changing nature of thedecision models of the users of superannuation financialreports (Gordon 2007). Basic content analysis is used toextract themes from two sets of submissions: first, themember responses to The Review 2009 to understanduser/member needs; and second, submissions to the2007 Consultation Paper to investigate the role ofconsolidation for superannuation entities. This dataanalysis is rudimentary but it represents a first step toimpose rigour on member (and other) submissions, andto sway accounting standard setters and regulators toheed stakeholder opinion, especially in the aftermath of

Superannuation in Society: Accountability Relationships and Group Accounting I. Gordon

the global financial crisis. The two accountability issuesof the precise user base of superannuation reports andapplicability of transaction neutrality to consolidatedaccounts for superannuation entities are addressed byED 223.

Economic Role of Superannuation

Populations have a long-term retirement liability thatneeds to be funded over their lifetimes. The purposeof superannuation is to help Australians save for theirretirement so that this liability is funded (Kiosse andPeasnell 2009: 255). For this to occur, members needassurance that superannuation monies are safe andsecure, sufficient incentives are provided to encourageretirement savings, and that government regulation andpolicies are stable over the long term so it is possiblefor members to reasonably plan for their retirement.The economics of the pension contract span socialand cultural organisations as well as legal institu-tional arrangements (Kiosse and Peasnell 2009: 261).Therefore, (pension) accounting does not exist in a vac-uum but operates within complex social arrangementsand institutional frameworks.

Society, culture and organisation of superannuationin Australia

For more than 100 years prior to award superannuation,superannuation schemes in Australia were generallydefined benefit plans (DBPs) (Ward 1998: 13).3

Superannuation was regarded as a managerial gratuitybecause members were predominantly managers andwhite collar workers (Ward 1998: 9). Also, membersof the superannuation funds were predominantlymale (Gunasekera and Powlay 1987: 3). These earlysuperannuation funds provided a select group ofsalaried employees an independent retirement income(Gunasekera and Powlay 1987: 3). They were establishedmostly by banks, insurance companies and financialinstitutions (Richards 1972: 6). At the same time, somepublic-sector superannuation funds were established, forexample, the Police Superannuation and Reward Fundin 1862 (Ward 1988: 10).

Use of selective accrual and vesting rules inAustralian DBPs trust deeds was common and restrictedsuperannuation benefits to a select few (Ward 1998: 13).For example, qualifying periods of at least 10 years ofcontinuous employment were usual. Often, the actualpay-out for early withdrawal fell markedly short of theretirement benefit due, permitting the DBP surplus toaccumulate as a pool of unallocated assets.

The growth of superannuation funds, both inAustralia and overseas, was phenomenal during the1950s and 1960s (Palmer 1976: 53). As the pension

means test arrangements were relaxed during the1950s to 1970s, superannuation in Australia becamea supplement to the aged pension (Gunasekera andPowlay 1987: 3).4 The Labor government investigatedthe creation of a national superannuation schemein 1972.5 Subsequently, the Hancock Report (1976)recommended the establishment of a contributorynational superannuation scheme after the AustralianBureau of Statistics (ABS) identified poor workercoverage for superannuation in 1974.6 For private sectorfunds, the Hancock report recommended compulsoryearly vesting of benefits and the requirement forthe sponsor firm to make up any deficiencies upona plan termination, but no action was taken. Thisreport also noted that, at that time, large funds(membership between 11 and 1000 members) weremore likely to be DBPs while the smaller funds (10members or fewer) were more likely to be definedcontribution plans (DCPs). Although DCPs were morenumerous, they represented a much smaller propor-tion of total membership (Gunasekera and Powlay1987: 6).

Institutional arrangements

Dissatisfied with the inadequate coverage of superan-nuation for the general workforce, a professed outcomeof the Hawke Government’s ‘Accord’ in 1983 was theencouragement of union interest in superannuation(Ward 1998: 1). The achievement of full wage indexationalso made it easier for the Government to shift unioninterest towards extra benefits, such as superannuation.As the union movement became involved in negotiatingsuperannuation benefits for its members, the popularityof the DCP (relative to the DBP) structure increased(Gunasekera and Powlay 1987: 6).7 The unfavourablevesting rules of DBPs in Australia at that time also added afurther impetus. The 1986 National Wage case delivered a3% wage productivity increase through superannuationrather than direct wage increases. The industry-basedschemes featured the DCP structure with immediatevesting, preservation and portability, modest benefitswith a determinable superannuation cost compatiblewith the wage-fixing directives of the Australian Councilof Trade Unions (ACTU) (Gunasekera and Powlay1987: 9). Superannuation coverage of the generalworkforce in 1986 was 47.3%, but female and part-time workers were under-represented (Gunasekera andPowlay 1987: 15). When the Superannuation GuaranteeCharge (SGC) legislation was introduced on 1 July 1992,the result was to increase the coverage of superannuationfor Australian workers and affirm superannuation in theworkplace as a type of deferred pay.8 By 1992, 92% ofthe Australian workforce was covered by (compulsory)superannuation compared to 32% in 1974.9

To protect superannuation arrangements, theGovernment enacted the first superannuation relatedlegislation in Australia, called the Occupational Super-annuation Standards Act 1987 (OSSA). The Insuranceand Superannuation Commission (ISC) responsiblefor administering OSSA and the Occupational Super-annuation Standards Regulations (OSSR) were alsoestablished at this time. OSSA was replaced by theSuperannuation Industry Supervision Act (SIS) on 1 July1993, and the SIS Regulations, effective 1 July 1994.The SIS Act and Regulations set out the duties oftrustees, auditors and plan administrators, includingreporting requirements of the superannuation plan.10

The Australian Prudential Regulation Authority (APRA,established 1 July 1998) is responsible for supervisingand regulating superannuation plans. APRA replacedthe ISC as principal regulator of superannuation plans inAustralia. The objectives of the Superannuation Groupwithin APRA are to ensure the prudent managementand sound growth of retirement income savings throughsuperannuation, to protect members’ benefits and toensure that taxation concessions for superannuationplans are used for approved purposes.

Also, combination plans, now referred to as hybridplans, emerged in Australia during the 1970s. Theseplans have a dual benefit structure with the employers’benefits placed in the DBP section and the employees’contributions plus investment earnings in the DCPsection. In this way, the advantages of both formsof plan design (that is, DBP and DCP) could beobtained. This split benefit design was common inpublic sector schemes during the 1980s, such as theCommonwealth Superannuation Scheme and othermajor public sector schemes in New South Wales andthe Northern Territory. Hybrid plans have becomemore popular to accommodate spouse contributions,additional contributions from the employee (notthe employer) and roll-overs into corporate plans.11

However, the purchase of lifetime annuities is notcompulsory for Australian retirees. Therefore, longevityrisk (that you will outlive your retirement monies)remains unless, first, superannuation is preserved untilretirement and second, superannuation is in the formof an income stream during retirement (Borowski andOlsberg 2007: 207).

The social, cultural and organisational factors thatinfluence the accounting for superannuation aresummarised in Figure 1. Referring to Figure 1, pensionaccounting can be seen as a derivative of these social,cultural and organisational forces.

It is likely that the complexities of the social, culturaland organisational factors surrounding superannuationcontribute to the uncertainty regarding the user baseof superannuation financial reports and accountabilityrelationships.

Disconnect between Economics andReporting by Superannuation Funds:The Review 2009

Demographic changes, such as increased longevityand ageing of the populations and increasing health-care costs, carry important fiscal consequences forgovernments (Gittins, 1998). There have been anumber of government and parliamentary inquiriesinto superannuation since the introduction of theSuperannuation Guarantee Charge (SGC) in 1992.The task of the most recent review, The Review(Australian Government 2009), into Australia’s super-annuation system was to provide recommendationsto the government for reform, including transitionalarrangements, by June 2010. The member’s best interestsand maximising retirement incomes for Australiansrepresent the (articulated) central tenets of The Review2009, along with the statement of principles includingequity, simplicity and efficiency.

The Review 2009 was timely given how membersuperannuation balances plummeted during the globalfinancial crisis (GFC) (‘Superfund set to post worstreturns on record’ The Australian Financial Review10 June 2009: 53). However, The Review 2009 didnot make recommendations with respect to the role ofaccounting in superannuation, preferring to promotea large-scale, low-cost default fund (called MySuper)rather than rely on (accounting) disclosures.12 This viewis at odds with the academic accounting literature thatsees the social role of accounting as relevant when there isa separation of the ownership of assets from the controlof those assets (American Accounting Association 1966:26). This begs the following questions: why hasn’t thesocial function of accounting played a larger role withrespect to accountability by superannuation entities tomembers, and why has inertia featured so strongly, notonly within the superannuation industry itself, but alsowithin the accounting profession and financial media interms of reporting to members?

The accounting profession: accountability or decisionusefulness?

The overarching purpose of financial reporting is tocommunicate the economic reality about the activitiesof (reporting) entities to interested users (IASB 2010:paras OB 1, OB11). The underlying rationale is thatthe provision of relevant and faithfully representedeconomic information will assist interested users tomake their resource allocation decisions (IASB 2010:paras OB 3). Typically, when economic entities useother people’s money (either from lenders or capitalproviders), the entity will render an account to the

Figure 1 Pension accounting in context: society, culture and organisation. Source: Gordon et al. (2008)

principal(s) concerning the ability of the (business)entity to generate expected future cash flows. The IASBConceptual Framework for Financial Reporting (2010:para OB5) considers existing and potential investors,lenders and other creditors as the primary users ofgeneral purpose financial reports. For other entities(such as not-for-profit and public-sector entities),stewardship of the resources to which the agents havebeen entrusted is also relevant.

Most superannuation funds in Australia are trusts,where the superannuation assets are held in trustby the plan trustee for the benefit of the members(Wall 2009). The trustee’s duties are set out in the SIS Actand regulations. In the context of superannuation, thestewardship function of accounting focuses on showingthe member how the assets of the superannuation fundhave been invested and managed by the trustee, thereturn on investments and the fees and costs incurred.Generally, accountability information is backwardlooking. On the other hand, international accountingstandard-setters now centre on the decision usefulnessof financial information and emphasise the relevance offinancial information to enable users to make resourceallocation decisions. Decision usefulness of financialinformation enables users to use the information asinputs into their predictive processes to either reviseold expectations or produce entirely different scenariosfor the future, that is, forward looking. Peasnell et al.

(2009: 521) state that the subjugation of stewardship bydecision usefulness under the Conceptual Frameworkoverlooks the fact that accounting serves multiplefunctions and that the same set of information willnot necessarily serve decision usefulness and stewardshipfunctions of accounting equally.

As part of the comprehensive review of superan-nuation fund reporting, the AASB issued ED 179 in2009 and ED 223 in 2011. ED 179 and ED 223state that the objective of the standard is to specifyrequirements for general purpose financial reporting bysuperannuation funds to provide users with informationthat is useful for their decision making. Both ED 179Basis for Conclusions (para BC10) and ED 223 Basisfor Conclusions (para BC9) state the primary users ofsuperannuation fund general purpose financial reportsare members and beneficiaries, representatives employedon their behalf, and employer sponsors. However,employer sponsors are normally regarded as preparers,not users of general purpose financial reports. It ispuzzling that the EDs include employer sponsors asusers of superannuation fund reports, especially sincethe Corporate Super Association submission to theConsultation Paper (2007: 2) states ‘Employers havea representative seat at the trustee table and accessto many detailed sources of information’. Althoughemployer sponsors contribute to superannuation entities(as noted by ED 223 Basis for Conclusions para BC10), the

nature of these contributions have the characteristics ofdeferred pay, rather than a type of gratuity. The prefaceto ED 179 acknowledges that superannuation fundreporting introduces users other than those normallythe focus of Australian accounting standards but isunclear about the decision models of members (definedbenefit and defined contribution), and the circumstanceswhere employer sponsors are considered general purposeusers.13

Member responses to The Review 2009:accountability or decision usefulness?

The member responses to The Review 2009 Phase Oneon Governance, represent a once-off opportunity bysuperannuation members to raise issues publicly, anopportunity not otherwise available as members area diverse group who lack common representation. Toanalyse the content of the member responses, this paperborrows from the Statement of Principles intendedto guide the government’s assessment of The Review2009 recommendations for reform. The Statement ofPrinciples include: simplicity, efficiency and equity. Foreach member response, the three main issues raised bythe respondent are identified and classified accordingto these Statement of Principles of The Review 2009.There were only 25 submissions from members to TheReview 2009 Phase One on Governance (when there wereapproximately 33 million superannuation accounts inAustralia as at June 2009).14

The lack of accountability by superannuation trusteesto members was a central theme of member submissions.The overarching objective of ED 179 (and ED 223) ofdecision usefulness was not specifically mentioned inmember submissions.15 Referring to Table 1, membersubmissions also revealed concern over issues relevant tothe principle of simplicity (for example, the members’best interests and clarity of fees). Specific issues raisedby member responses included the compromise of themember’s best interests, concerns about the operation ofthe sole purpose test, unnecessarily complex regulationsand lack of accessibility to the trustee’s decisionmaking process. One member submission (focusing onaccountability) suggested that certain RPT (manage-ment compensation) should be disclosed to members.Disclosure of management remuneration for not-for-profit industry funds is receiving attention in the media(‘Industry Funds in Disclosure Spotlight’ The AustralianFinancial Review 28 November 2011: 52). Another twomember submissions stated that choice of fund shouldbe extended to public-sector members as well. Overall,members were less concerned about efficiency andadequacy issues concerning superannuation but morefocused on issues concerning the principles of simplicityand equity (including accountability).

Members’ stated preference is for more accountabilityby superannuation funds even though ED 179 (andED 223) emphasises decision usefulness of superan-nuation fund reporting. Although both accountabil-ity/stewardship and decision usefulness functions ofaccounting are likely relevant, decision usefulness is lessrelevant if members do not have choice of fund, lackeasy access to superannuation fund accounts that arealso comparable, lack access to understandable productdisclosure statements and trustees are not answerablefor their actions to members. One example of lack oftransparency to members of a public fund is the absenceof transaction detail disclosures surrounding incurrenceof capital gains tax on the sale of investments by the fund(to pay out a retiring member), and the adverse impactthis may have on other (continuing) member balances(‘Regulator outlines standards overhaul’ The AustralianFinancial Review 29 September 2011: 20).16 For tax awaremembers, it is possible that this has contributed to thegrowth of self-managed superannuation funds, alongwith the fact that imputation credits can be used to offsettax on contributions.

The way forward: accountability or decisionusefulness?

The SIS Act derives its legitimacy from the solepurpose test, that is, that superannuation monies arefor the sole purpose of retirement. By promotingMySuper, The Review 2009 sought to maximise the socialgood (that is, the sole purpose test) by realising themaximum retirement monies for a largely unengagedsuperannuation society. The Review 2009 labels itsapproach as ‘libertarian paternalism’ (Super SystemReview Final Report Part One). While The Review2009 (see Super System Review Final Report: 13)acknowledges that there is a lack of transparency,comparability and accountability in the Australiansuperannuation system at present, it does not considerthe role of accounting to address this accountabilityshortfall.17 In this way, The Review 2009 side steps thearguments of superannuation plan administrators thatdisclosure of information to members will only ‘confuse’or is too ‘costly’. That is, The Review 2009 does notrely entirely on natural systems of social utility whererational individuals combine to maximise the greatestsum of their retirement monies, more likely because thelatter approach assumes that individuals have rights toinformation and choices (as, for example, in the self-managed superannuation sector but less so in the publicsector). Fry et al. (2007) suggest that the reluctance ofsuperannuation members to exercise choice exhibits lossaversion. However, over time, as marketing strategiesin superannuation create awareness of choice amongmembers, The Review 2009’s limited characterisation of

Table 1 The Review 2009: Classification of member responses according to The Review 2009’s Statement of Principles

Total no. Responses Responses Responses Responsesof member addressing addressing addressing addressingresponses Simplicity Efficiency Equity Adequacy

Keywords foreach principle

Sole purpose test;member’s bestinterests; stableregulation;compulsory; feeclarity; fund type

Economies of scale;measuring trusteeperformance

Fair treatment;choice legislation;sustainability;trusteegovernance –duties of trustee,trustee training,accountability tomembers

Investment advice;conflicts ofinterest; impact ofGFC; maximisereturns; defaultfund; protectassets; memberengagement;investments

No. of memberresponsesaddressingeach issue

25 20 4 19 9

members as being largely unengaged will likely changeand a more concrete role for understandable financialdisclosures will probably crystallise.

The Review 2009 fundamentally differs with theaccounting profession with respect to the social roleof financial disclosure for superannuation members.Superannuation in Australia has changed from amanagerial gratuity to a form of deferred pay.Superannuation is no longer at management’s discretionwith benefits selectively accrued to a few, and witha limited role for accountability reporting by trusteesto members (as evidenced by member responsesto The Review 2009). However, The Review 2009overlooks the role of accountability reporting tomembers in its recommendations. Yet the accountingprofession endorses the presentation of decision-usefulfinancial reporting to members. To the extent thatthe accounting standard setters subjugate accountabilityand stewardship by decision usefulness in ED 179and ED 223, the accounting profession also overlooksmember sentiment for accountability reporting. Thereis also uncertainty concerning who the users ofsuperannuation fund reporting are, as demonstratedby the disjunction between how the Corporate SuperAssociation submission to the Consultation Paperview the information needs of the employer sponsorcompared to ED 179 and ED 223. With compulsorysuperannuation and increasing social awareness ofthe role of superannuation, it appears that both theaccounting standard setters and regulators have failed toreflect the shifting social contexts of superannuation: theaccounting standard setters by overlooking the centralrole of stewardship in a deferred pay regime; and theregulators by adopting an antiquated view of membersas not interested in financial disclosures and, as a result,captive to inertia.

Disconnect between Economics andReporting by Superannuation Funds:The Consultation Paper 2007

The Consultation Paper 2007 considered the applicabil-ity of consolidation accounting to superannuation fundsafter Australia had converged to international financialreporting standards (IFRS) in 2005. Consolidatedfinancial statements (CFSs) aim to present the financialperformance and position of a group of entitiesoperating as though they were, in substance, oneeconomic entity.18 CFSs show the results of operations ofeconomic resources controlled by the group or economicentity. The economic resources of the parent and itssubsidiaries are added together, on a line-by-line basis,so that like categories of assets, liabilities, revenues,expenses and equity are totaled in the CFSs.

A review of the history of consolidation shows thatthe process of consolidation has changed in response tothe reported abuses of consolidation accounting. Forexample, when majority ownership was used as thecriterion for consolidation, anecdotal evidence (Walker1990; Sykes 1988) exists to show that managementhad a propensity to exclude debt-laden or loss-makingentities from the consolidation process. Australianaccounting standard setters (AAS 1024 — ConsolidatedAccounts 1991) responded by changing the criterionof consolidation from majority ownership to control,and expanding the ambit of consolidation to includeunincorporated entities (including trusts) as well. AsAustralian accounting standards converged with IFRS,the accounting by superannuation funds themselveswere considered a domestic issue and not included as partof the IFRS process. Post IFRS, consolidation accountinghas endorsed the entity approach to consolidationreporting (see AASB 3 – Business Combinations 2009).19

Reservations with respect to the effectiveness ofconsolidated accounts to portray economic reality,especially in view of the absence of a legal corollary forthe group economic entity, were expressed much earlierby Clarke and Dean (1993).

Applying consolidation accounting tosuperannuation funds: transaction neutrality

In the aftermath of the GFC, concerns exist once againthat the process of consolidation has been misused tokeep ‘bad news items’ off the balance sheet (Ernst andYoung 2011). For example, Lehman Brothers was ableto ‘window dress’ its accounts and keep US$49b ofdebt off the consolidated balance sheet. Internationalaccounting standard setters responded by issuing ED10 Consolidated Financial Statements in December 2008,which proposes a new definition of control based onthe power to generate returns. The objective of ED 10is to capture those (special purpose) structured entitiesthat de-emphasise risks and rewards, thereby avoidinga literal interpretation of the control definition, andas a consequence avoid the consolidation process. Thetension between control and ownership is a recurrenttheme in consolidation accounting that ED 10 addressesby changing the focus of the control test to centreon the ability of the parent to generate returns. Asa result, these new requirements are seized by IFRS10 – Consolidated Financial Statements (issued May2011 effective 1 January 2013) to avoid situations wheredistressed or sub-standard (controlled) entities are notconsolidated.

IFRS 10, pursuing the tension between ownershipand control, develops a new control model that appliesto all investees and increases the transparency ofmanagement’s decision-making processes concerningapplication of the control model. Departures fromthe principle of transaction neutrality with respect toconsolidation accounting are questionable if exemptionsfrom consolidation accounting are allowed for somereporting entities (and not others). The argumentto exclude superannuation funds from consolidationaccounting because the activities of the superannuationfund are different from commercial activities is tenuous(Arthur 2008: 10). Central to the assessment of controlis an understanding of the purposes and design of eachinvestee. Allowing superannuation funds leeway to notconsolidate investees perpetuates the selective use ofconsolidation. At the time of writing, ED 223 is seekingcomment on the application of transaction neutrality tosuperannuation funds.

As superannuation savings increase, asset investmentstrategies by superannuation funds have also changed.Over a number of years, superannuation entities haveheld controlling interests in pooled superannuation

trusts. It is now more frequent for superannuationentities to hold controlling interests in non-pooledinvestments as well. This has occurred as superannuationentities invest in alternative assets such as venture capital,infrastructure and private equity (‘Alternative SuperBeats Convention’, The Australian Financial Review25 January 2006). Also, as the (efficiency-push) mergerof superannuation funds continues, it is likely thatconsolidation accounting will be increasingly relevant tosuperannuation funds. For example, Catholic Super isundergoing a process of mergers using a sub-plan modelwhere the sub-plan operates as a separate subsidiary(‘Catholic Super Draws in Faithful’, The AustralianFinancial Review 28 November 2011: 52).

Submissions to the Consultation Paper 2007:producer groups

The purpose of the Consultation Paper was to considerthe issues relevant to the consolidation of subsidiariesby superannuation entities and also other alternatives,including full fair value models. Superannuation servesas a context to highlight the tension between fair valueaccounting and the consolidation technique since netmarket values have long been used to value assetsso the retiring member balances could be calculatedrealistically. While the AASB considered the use of fairvalue accounting appropriate for separate accounts ofthe parent superannuation entity, it also consideredconsolidated accounts as useful information to usersbecause simply showing the net worth of a subsidiaryas one line on the parent’s balance sheet was insufficient.The Consultation Paper proposed four consolidationmodels ranging from a full fair value model for allassets and liabilities (whether recognised or not inparent/subsidiary’s books) to consolidated accountsprepared according to AASB 3 – Business Combinationsand AASB 127 – Consolidated and Separate FinancialStatements.

Submissions to the Consultation Paper were receivedfrom the Corporate Super Association (CSA), the Asso-ciation of Superannuation Funds of Australia (ASFA),CPA Australia, Ernst and Young, KPMG, The Instituteof Chartered Accountants (ICAA), Grant Thorntonand PWC.20 These submissions are summarised inTable 2 according to the following keywords: users,nature of superannuation activities, control, meaningof consolidation to users and recommendations. Somesubmissions (for example, the Corporate Super Asso-ciation) stressed the differing operating environmentsof superannuation funds compared to commercialentities. They argued that superannuation funds have aninvestment focus, not a business focus as superannuationfunds do not control entities to manage them, butfor investment purposes. Therefore, along with this

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reasoning, superannuation funds are interested inmonitoring the investment, not operating it. As aconsequence, CSA did not support the application ofthe principle of transaction neutrality for consolidationaccounting to superannuation funds. However, thisargument is diluted to the extent that, as superannuationfunds increasingly acquire controlled entities as part oftheir investment portfolios, it becomes more difficultto separate out investment monitoring from businessoperations. This is because good investor stewardshipprinciples would require the superannuation fund tooperate within good standards of stewardship for allinvestments.

Submissions to the Consultation Paper also stressedthe restricted nature of users of superannuation fundreports. The usefulness of consolidated statementsto this restricted base of users (members) wasquestioned by most submissions to the ConsultationPaper.

Reasons included: member benefits under choicedepend upon investment strategy, and not net assetsof the whole fund (APRA); members require prod-uct disclosure statements not consolidated accounts(ICAA); existence of non-controlling interests would bemisleading (CPA Australia, ASFA); possibility that thedefined benefit liability may be measured using differentmethods may be confusing (Ernst and Young); membersdo not use CFSs (ASFA); and the additional costsattached to producing consolidated accounts (ASFA).Some submissions (CPA Australia and CorporateSuper Association) recommended note disclosuresfor material investments in subsidiaries for riskassessment.

CPA Australia’s submission initially adopted aconceptual approach and expressed a preference forone principle (consistent with transaction neutrality),that is, that all entities consolidate their controlledentities regardless of their industry. This stance wascompromised by CPA Australia as they argued that(consolidated) information would not be decision usefulto users of superannuation entity financial reports. Alongsimilar lines, one member submission to The Review2009 questioned the aggregated nature of consolidateddata and emphasised that members need reliableinformation about their superannuation sub-scheme,not just the overall scheme. However, the submissions tothe Consultation Paper do not refer to empirical researchto justify their stance that consolidated informationis not decision useful to users/members. Only onesubmission (Ernst and Young) noted an advantage ofconsolidated reports, namely that consolidated reportinggives an overall view of the stewardship of assetsunder the superannuation entity’s control. Consolidatedaccounts are also useful as stewardship statementsbecause they eliminate the distorting effects of intra-group transactions (Hadden 1980).

The way forward: consolidation or fair value forsuperannuation funds?

Overwhelmingly, most submissions to the ConsultationPaper supported the use of full fair value forsuperannuation entities on the basis that consolidatedstatements are not decision useful. Applying the fairvalue measurement method to superannuation entitiesis conceptually similar to the measurement approach forassets in AAS 25, although the IASB guidance on fairvalue is more rigorous. Using fair value of assets forDCPs enables users to assess the capacity of the fundto pay benefits, or in the case of DBPs, enhances theassessment of solvency. The fair value approach for assetsis also consistent with the SIS Act. However, measuringsuperannuation liabilities at fair value (rather than vestedor accrued benefit measures) is less popular, especiallyfor DBPs where there is an absence of a market for definedbenefit obligations.

Knowledge about the use, extent and nature of groupsby superannuation entities is limited. Consolidationaccounting, supported by disclosures about the nature,purpose and risks of each subsidiary within thesuperannuation fund group structure (including anyRPTs, for example, management/trustee compensation)should be available to members as part of the trustee’saccountability reporting to members. Contrary tothe submissions to the Consultation Paper 2007, theAASB did not dismiss consolidation accounting forsuperannuation entities but is seeking comment withrespect to the application of transaction neutrality tosuperannuation funds (see ED 223).

Conclusion

Superannuation has social, economic and politicalrelevance. It also poses policy challenges for ageingpopulations, deteriorating dependency ratios anddeclining asset values as a result of the recentGFC. One of the likely policy challenges for theAustralian Government includes the trend towardsdefined contribution plans where the investment risk isborne by the member who may be less equipped than theemployer to bear this risk. In this case, the Governmentultimately underwrites longevity risk. To counter thisrisk and ensure the sustainability of the superannuationsystem, a policy initiative for the Australian Government,given widespread defined contributions plans, shouldbe to improve the financial literacy of the generalpopulation so that they may better handle the investmentrisk. Another initiative is for superannuation fundsto target their performance for members to betterassess if they are on track to achieve their retirementobjectives (‘Custom Measures a Key to Super Success’,The Australian Financial Review 5 December 2011:

46). The role of accounting becomes clear: accountingstandard setters need to be cognisant of the way the socialand institutional contexts allocate the risks for providingfor superannuation and how this affects accountingby superannuation funds to their members. However,prudential regulators tied to a ‘libertarian paternalism’philosophy or accounting standard setters wedded todecision usefulness at the expense of the stewardshipfunction of accounting are potentially impeding thesocial function of accounting in superannuation.

As the nature of superannuation has shifted froma managerial gratuity to a form of deferred pay,the role of accounting in superannuation needs tobe responsive to changes in the economics of thesuperannuation transaction. For example, memberinertia (or adherence to the status quo) is less likelyto be prevalent in the future as a greater proportionof members are expected, over time, to becomeaware of their retirement obligations. This anticipatedincrease in member awareness is partly due to theGFC and partly to the increasing economic significanceof superannuation to the Australian economy, likelyincreasing the role for accounting. Lack of transparencyand accountability to members is a cause that needschampioning. Understanding the role of financialreporting in the superannuation context is central toproviding information that is useful to members. Aslong as the reporting of the pension transaction isnot linked to the economics of pensions, those partiesaccepting the risks (that is, members) will be deprivedof relevant information to manage those risks. Underthese circumstances, it is baffling how the government’sretirement objectives will be optimally met.

If, after gathering robust empirical data concerningthe user decision model of superannuation members,established financial reporting conventions fail toprovide information that is useful, then there is aneed for change of those reporting principles. Forexample, one of the lessons of the recent financial crisisis the poor communication of risk by the financialservices industry to investors. It is acknowledged thatexplaining the technicalities as well as the risk outcomesof financial transactions may be challenging, but themedical profession has faced similar issues and soughtsolutions (see ‘Pension investors fail to get the message’Financial Times 27 July 2009: 3). The legal professionis also tackling problems with the lack of clarity injudges’ decisions (‘Judges learn to make sentences lesscryptic’ The Australian Financial Review 9 October2009: 44).

Similarly, accounting standard setters should not, inthe absence of any empirical evidence, assume that thegeneral purpose financial reports of superannuationentities are limited and that members are not interested.Although the number of member submissions to TheReview 2009 was very low, this underscores the disparate

nature of superannuation members and their commonlack of representation within the superannuation system.It does not necessarily support contrary argumentsthat members are not engaged and not interested,especially within an economically significant sector suchas superannuation that is characterised by very restrictedreporting to members anyway. The recent explosionof the self-managed superannuation sector shows thatmany members are engaged, especially when they havea choice of fund.

Accounting standard setters need to explore otheroptions so that the accounting for superannuationreflects the underlying economics of the superannuationtransaction from the member perspective. The ChiefExecutive of QSuper likens superannuation to ‘a mysteryairline flight’ where members are given a ‘ticket’without a firm destination (‘Custom Measures a Keyto Super Success’ The Australian Financial Review5 December 2011: 46). One solution may be to researchthe member user decision model to see if stewardship isthe overriding concern by members, and link this to thesocial and institutional pension arrangements in place.Future debates may address the complexity of productdisclosure statements (relevant to DCP members), andthe tensions between product- and entity-level reportingto members. Another solution with respect to CFSs ofsuperannuation (and other) entities may be to permitmore flexibility in the format of CFSs so that moreinformation about the strategic nature of the group andassociated risks is communicated to members (Hadden2011). This appears to be the direction in which IFRS 10is headed.

Isabel Gordon is at the University of Sydney.

1 The terms ‘superannuation’ and ‘pension’ are used interchange-ably. ‘Superannuation’ is normally used to refer to the Australiancontext, while ‘pension’ is normally used in overseas jurisdictions.

2 Reporting by superannuation funds occurs at three levels: to theregulator (Australian Prudential Regulatory Authority (APRA));audited whole of fund accounts supplied to members uponrequest; and annual report (unaudited) supplied to membersbiennially with member balance details. Reporting to APRA doesnot include consolidated accounts.

3 Most superannuation funds are established by a trust deed. Trustspermit duality of ‘ownership’: that is, the trustee has legal titleto the trust property but beneficial ownership rests with thebeneficiaries. The trustee is obliged to act in good faith withrespect to the management of the trust property on behalf of thebeneficiaries. However, a pension trust can be distinguished froma normal trust with respect to three factors: first, the memberof the superannuation fund is not a volunteer but gives valuableconsideration, and unlike a normal trust, is not in receipt ofa ‘bounty’ from the settlor of the trust; second, in a normaltrust there is usually no other legal relationship between theparties, apart from the trust, whereas in a superannuation trustthe employment contract defines the beneficiaries’ (economic)rights; and third, often membership of the superannuation

fund is a condition of employment, and may require theemployee to make contributions to the fund (Campbell 2008:16).

4 Although Australia was one of the first Western countries tointroduce an old age pension, apart from this, there was littlegovernment interest and projected allocation of resources for theageing population. The old age pension represents approximately25% of average weekly earnings. It is paid on a ‘pay-as-you-go’basis, which means that it can be viewed as an inter-generationdebt.

5 Prior to this, there were three unsuccessful attempts to introduceemployment related retirement income arrangements between1913 and 1938.

6 The Hancock committee released its recommendations in tworeports, one in 1976 and the second in 1977. Recommendationsincluded that superannuation funds provide annual reports andaudited accounts and other actuarial information.

7 In 1982–83, only 18% of members were covered by DCP benefitstructure, compared to 82% for DBP structure (Gunasekera andPowlay 1987: 6).

8 This legislation imposed a non-tax deductible levy on employerswho did not abide by the ‘compulsory’ superannuation contri-bution rates. The superannuation guarantee charge commenced1 July 1992, starting at 3% of employee earnings (7% from 1/7/98;8% from 1/7/2000) and increasing to 9% by 2002. It applies to allemployees earning more than $450 per month. Two importantaspects of SGC are that it endorsed a ‘compulsory’ system ofsuperannuation, and superannuation became a taxation issuerather than an industrial relations issue administered throughawards.

9 1992 statistic in Davis (1995) Table 3.4: 59 and 1974 statisticin Ward (1998: 22) quoting the ABS Survey on SuperannuationCatalogue No. 6319.0, 1974.

10 For example, SIS provides that the fund trustee owes a fiduciaryduty to the members and requires that trustees act in the members’best interests (s.52.1.c) for the dominant purpose of providingretirement / death benefits to members (s.62.1.a).

11 As at June 1995, of the total assets invested by Australiansuperannuation funds, DBPs account for 19%, DCPs for 51%and hybrid 29% (Bateman and Piggott 1996: 62). By June 1999,total assets invested by superannuation funds (excluding fundswith less than five members) comprised 7.5% for DBPs, 50.79%for DCPs and 41.71% for hybrid funds.

12 The Review 2009 into superannuation used a choice architectureto discriminate between funds on the basis of member engage-ment: disconnected, universal, choice and self-managed. Thechoice architecture focuses less on the form of the superannuationfund and more on the substance of the arrangements withmembers. The Review 2009 recommends the low-cost defaultfund ‘MySuper’ to cater for the majority of superannuationmembers considered to be ‘disengaged’ with their superannu-ation. MySuper would include a vanilla investment productcalled ‘dashboard’ along with standardised disclosures about theproduct’s risk and return targets, whether it is illiquid and feesand costs, including a projected total annual expense ratio (SuperSystem Review Final Report: 14).

13 See Gallery (1999: 40) Table 3.1 for a summary of thesalient differences between superannuation funds and publiccorporations likely to affect user needs for financial information.With the introduction of choice of fund in 2005, it is likely thatthese differences may reduce over time.

14 Submissions from members, academics and writers wereconsidered together if they spoke from the members’ platform(of the members’ best interests). The principle of adequacy wasremoved from The Review 2009 and included as part of the HenryReview into taxation. For the purposes of analysis by this study,the principle of adequacy is included.

15 One member response stated: ‘The security of superannuationsavings rests heavily on the assumption that members will bein a position to make well-informed judgements about whetheror not their fund is being run properly. For this purpose thereis nothing more important than the financial statements of thefund’.

16 The author is grateful to an anonymous reviewer for thiscomment.

17 Agency theory does not necessarily lend itself to a straightforwardapplication in the context of superannuation in Australia. TheReview 2009 discusses the use of the trust structure and duality ofownership: the member’s beneficial ownership and the trustee’slegal ownership of assets frustrates the clear separation ofownership of the asset (by the principal/member) from controlof the asset (by the agent/trustee). Agency costs between theprincipal and the agent arise due to poor accountability tomembers, lack of transparency of trustee performance, the factthat the member has no control over the appointment andremuneration of trustees, conflicts of interest (for example, relatedparty transactions) are not reported, and members have no rightof explanation from the trustee in the event of a dispute. The truststructure provides no incentive for the agent trustee to reducethese agency costs, and the regulator does not intervene. In effect,the principal/member may be denied the right of consent withrespect to his/her superannuation monies. Absent the principal’sright of consent to do as she wishes with her assets, then the agent(trustee) will be indifferent to agency costs.

18 Entity is broadly defined to include both incorporated andunincorporated entities including trusts, partnerships, businessventures and individuals.

19 Discussions with Jeremy Cooper, Chairman of The Review 2009,reveal shortcomings of the entity approach to reporting whenit is applied to reporting by superannuation funds. One issueincludes the complexity of product disclosure statements andthe inability of current reporting standards to capture thesecomplexities.

20 PWC submission was excluded from analysis as it referred to anearlier invitation to comment and did not relate to consolidationaccounting.

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