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MSB Board Annual Report to Parliament 2008-09

governance

Chief Executive Officer | Corporate governance statement | Vision Statement | Principal duties | Governance matters outside the Board’s control | General Governance Principles| Continuing Qualifications and Disclosure of Interests | Confidentiality | Legal-Professional Privilege | Securities Dealing | Gifts and Entertainment| Insurance | Board Committees | Meetings and Agenda | Professional Development | Managing Conflicts of Interest | Whistleblower Protection| Review of Corporate Governance of Statutory Authorities and Office Holders | Merger of the Boards of the Major Commonwealth Superannuation Schemes | Business Plan | Scheme Administration | Delegations| Board Committees | Executive | Financial Issues and Budget Strategies | Status Under the SIS Act and Corporations Legislation | Product Disclosure Statement| Financial Advice the Board Can Provide | Evaluation

During the year the Board continued to give particular attention to processes supporting decision-making, accountability and standards of service.

Chief Executive Officer

In November 2008 the Board appointed a new Chief Executive Officer, Mr Paul Watson. Mr Watson succeeded Mr John McCullagh who stepped down from the CEO Role after a long association with MilitarySuper, the last five years as CEO.

Mr Watson has extensive experience in the superannuation and related financial services industry.

Corporate governance statement

The Military Superannuation and Benefits Board (the Board) is constituted under the Military Superannuation and Benefits Act 1991 (the Act) and the associated Trust Deed and Scheme Rules. The Board stands independent of the government of the day and independent of any other constituency. It is accountable to the Members of the Military Superannuation and Benefits Scheme (the Scheme) under the Act, under the Superannuation Industry (Supervision) Act 1993 (the SIS Act) and under general corporate legislation. The principal responsibility of the Board is to act in good faith, with prudence and in the Members’ best interests in respect of the investment and administration of the Scheme.

The Board’s Charter is to:

• administer the Military Superannuation and Benefits Act 1991 and to effectively and efficiently meet its responsibilities under the Act
• manage and invest the Fund to provide real growth for Members’ investments while managing risk levels carefully.

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Vision Statement

The Board has adopted the following as its vision:

Our vision for MilitarySuper is that it be recognised as one of the best superannuation schemes in Australia.

The Board has identified its key purpose is to help past, present and future Australian Defence Force personnel secure their financial security in retirement.

The strategic objectives and key performance indicators identified in this report are intended to guide the Board in the realisation of this vision and purpose.

Principal duties

The Board’s principal duties are to:

• manage and invest moneys to meet the purposes of the Scheme
• ensure the Scheme is administered in accordance with the scheme rules and regulatory obligations
• cause the payment of moneys in and out of the Scheme to occur as prescribed
• safeguard the assets of the Scheme and the interests of the beneficiaries
• inform all relevant parties of the Scheme’s condition and conduct
• cause proper records and accounts to be maintained about the operation and financial activities of the Scheme.

In undertaking these duties, the Board has wide discretions. This factor, together with the reliance the Members have on the Board for the value and delivery of their retirement benefits, makes it essential that the Board, its officers, employees and delegates act at all times in a manner that is appropriate to the fiduciary duties owed to the Members.

The following statement sets out the principles which the Board, its officers, employees and delegates are intended to uphold as they each carry out their duties.

The Board does not intend this statement to be read as a strict set of rules, where each word is scrutinized for its legal meaning. It intends to convey in plain words the obligations placed on, and the behaviour expected of, both Trustees as individuals and those other persons covered by this statement. The Board reviews this statement annually, and updates or expands it as appropriate to ensure it remains effective and current.

Governance matters outside the Board’s control

The Board does not control its own composition or its remuneration. The power to appoint Board Members is vested in the Minister for Defence Personnel, Materiel and Science under the Act. The Board has, however, as a consequence of licensing, documented the skills and experience necessary for the Board as a whole to meet the ‘Fit and Proper’ operating standard. The Board has identified the skills of individual Trustees which have been relied upon in support of its licence application and when individual Trustees are being replaced the Board requests the Department of Defence to consider the knowledge gap left by the departing Trustee and take this into account in sourcing a replacement.

The Remuneration Tribunal sets the remuneration of Board Members, including their remuneration for committee representation and expense reimbursement.

General governance principles

The Board’s own behaviours reflect its overriding general governance principles, and where appropriate, mirror the behaviour which the Board expects from companies in which the Board invests and with whom it has commercial dealings. The Board’s duties must be carried out in good faith, prudently, and in accord with the relevant legislation so that the best interests of the Members are served.

The Board must at all times act ethically and impartially. No person covered by this Statement may place their own interests above that of the Members in respect of the fiduciary duties owed to the Members. Trustees and Board staff are expected to avoid placing themselves in situations of perceived or actual conflicts of interest. Where such situations do occur they are to be resolved in accordance with the Board’s policy for managing conflicts of interest.

The Board’s responsibilities for the Fund and the Scheme are supported by business planning, business risk assessment, management reporting, and arrangements for audit, internal control and compliance, all conducted on a regular basis. The Board’s appointments and delegations (including appointments and terminations of authorised representatives) are in writing and the Board regularly reviews its own activities and the activities of the persons through whom it works, to ensure that a clear and proper set of accountabilities remains in effect. The Board will, in accordance with the standards expected by APRA, undertake an annual review of its performance. The assessment will be undertaken at individual trustee level as well as the Board as a whole.

Continuing qualifications and disclosure of interests

Board Members will lodge, on appointment and annually thereafter, a Disclosure of Interests Statement and a Declaration of Related Party Transactions. Board Members will advise no later than the start of the next Board or Committee meeting:

• if any event has changed their continuing compliance with the trustee qualification requirements set out in the SIS Act
• if any agenda item requires a disclosure of interest
• if any change in their business relationships has occurred that might have a connection with the Board’s duties or activities. In accordance with the Board’s policy for managing conflicts of interest where a Board Member has a conflict of interest in respect of any matter, that Member will not engage in discussion of, or decision on the matter.

The Board’s Responsible Managers under its Australian Financial Services (AFS) licence (Chief Executive Officer and Compliance Manager) will certify on an annual basis that there has been no change to their circumstances, including loss of professional qualifications, impacting on their suitability as Responsible Managers. In addition, the Board Secretary and Investment Analyst will certify on an annual basis that they have not lost any professional qualifications.

Confidentiality

Board Members are required to keep confidential all information or material provided or made available to them, dealing with or related to their functions as Board Members, except where such information or material is publicly available or is required by law to be disclosed. Board Members continue to be bound by this obligation of confidentiality after they cease to be a Board Member.

In this context, ‘Board Members’ includes persons appointed to the Board, staff employed by the Board, service providers to the Board, and any person to whom Board papers, documents or information is made available.

Communications, contracts or arrangements between the Board and service providers will generally be entered into on a ‘commercial-in-confidence’ basis.

Legal professional privilege

The general policy of the Board is that legal advice provided to the Board for the performance of its functions and duties will not be made available or disclosed.

Securities dealing

The Board is mindful of its obligations under the law to not misuse non-public information of which it becomes aware in the course of carrying out its duties. Board Members will maintain appropriate records of their dealings in securities and will provide a copy of these records to the Executive if requested by the Board.

This requirement applies to the Board’s staff, and any other persons connected with the Board who have access to the investment information of the Board.

Gifts and entertainment

As a general principle Board Members should decline or disclose instances of repeated or significant entertainment or gift from any service provider. Board Member contact with current and potential service providers is recognised as useful to enhance the knowledge and understanding of the Board. It is recognised that service providers to the Board provide modest entertainment and small gifts from time-to-time. Details of gifts or entertainment that are more than a token must be supplied to the Board’s Chief Executive Officer for inclusion in a register. The Board’s policy on Managing Conflicts of Interest forms part of the Board’s Code of Conduct and provides guidance on how to determine whether a benefit is more than a token.

Insurance

The Board will maintain insurance in respect of its own actions and in respect of past Board Members in order to protect the interests of Scheme Members and the assets of the Fund.

Board committees

The Board has constituted several committees to increase its own efficiency and to provide a means of more detailed consideration of matters important to the running of the Scheme. The governance structures and processes of the Board’s committees include formal risk management and reporting arrangements. These reinforce the commitment of the Board to scrutinise its own processes to ensure transparency in identification of conflicts and separation of functions. Board committees are subject to written terms of reference and care is taken to ensure the activities of each committee remain consistent with the Board’s duty of governance over the Scheme’s activities. Each committee reviews its performance annually and the Chair of each committee reports to the Board following each review.

Meetings and agenda

The Board meets at least six times each year and ensures that it receives appropriate and reliable reporting on the condition of the Scheme and the actions of its staff, delegates and other service providers. Although the Board’s agenda is initiated by the Executive on behalf of the Board, the Board or any Board Member may require a matter to be brought before the Board at its next or any subsequent meeting.

Professional development

The Board’s policy is that Board Members and staff should engage in continuing professional activities relevant to the operation of the Board as a whole and their individual Board Member or staff duties. This is an essential component of the Board’s obligations as the APRA licensee of a registered superannuation fund. The Board provides organisational and financial support for such professional development activities.

Professional development activities may include local and international conferences, seminars and workshops, training courses and study tours on specific matters relevant to the Board’s functions. Once each year the Board will consider Board representation at major industry conferences to be held over the forthcoming year (both in Australia and overseas). Board Members and staff who undertake professional development activities are expected, where appropriate, to provide reports to the Board and to distribute relevant papers to other Board Members and staff. The Board also encourages Board Members to be Members of relevant professional bodies such as the Association of Superannuation Funds of Australia, the Australian Institute of Superannuation Trustees and the Australian Institute of Company Directors and meets the costs of such Memberships, where appropriate.

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Managing conflicts of interest

The fiduciary role of Trustees requires them to act in the interests of beneficiaries of the Fund and not in their own interests or those of external parties such as service providers, fund managers or investment advisers. Wherever possible, Trustees (and others covered by the code) should avoid placing themselves in a situation where there may be conflict of interest between the interests of the Board and their personal or professional interests and those of related parties. The Board recognises that inevitably conflicts will arise and these events must be declared and managed. It is not only actual conflicts which require management but also the perception of conflict.

The requirements in respect of the disclosure of interests are contained in the Trust Deed. Clause 7 of the Trust Deed requires:

(1) ‘That each trustee shall:

a) As soon as possible after, but in any case no later than 60 days after appointment as a trustee

b) As soon as possible after, but in any case no later than 60 days after, each anniversary of the trustee’s appointment as trustee, present to a meeting of the Board a statement in writing setting out particulars of those interests, whether pecuniary or otherwise and whether direct or indirect, of the trustee as at the date of appointment or as at the anniversary, as the case requires, that could reasonably be expected to conflict with the proper performance by the trustee of the trustee’s duties as trustee.

(2) A statement presented by a trustee to a meeting of the Board in pursuance of subclause (1) shall be incorporated into the minutes of the meeting.

(3) Where a Trustee acquires an interest, whether pecuniary or otherwise and whether direct or indirect, that could reasonably be expected to conflict with the proper performance by the trustee of the trustees duties as trustee and a statement containing particulars of the interest has not been given to a meeting of the Board in accordance with subclause (1), the trustees shall, as soon as possible after acquiring that interest, present to a meeting of the Board a statement in writing setting out the particulars of the interest and the statement shall be incorporated into the minutes of the meeting.

(4) A Trustee who has a direct or indirect pecuniary interest in a matter being considered by the Board shall, as soon as possible after the relevant facts have come to the trustee’s knowledge, disclose the nature of the trustee’s interest at a meeting of the Board.

(5) A disclosure under subclause (4) shall be recorded in the minutes of the meeting of the Board and the Trustee shall not, unless the Board or the Minister otherwise determines:

a) be present during any deliberation of the Board with respect to the matter

b) take part in any decision of the Board with respect to that matter.

(6) For the purposes of the making of a determination by the Board under subclause (5) in relation to a trustee who has made a disclosure under subclause (4), a trustee who has a direct or indirect pecuniary interest in the matter to which the disclosure relates shall not:

a) be present during any deliberation of the Board for the purposes of making the determination

b) take part in the making of the Board of the determination.

(7) Where a trustee is obliged by subclause (4) to disclose the nature of an interest at a meeting of the Board, the fact that the trustee has presented to a meeting of the Board a statement under subclause (1) or (3) that includes particulars of that interest does not relieve the trustee of the trustee’s obligations under subclause (4).’

The Board has considered its business activities in terms of areas for potential conflict. While it is not practical or possible to specify all instances which might give rise to a conflict of interest the Board’s Conflict of Interest policy document provides guidance on the management of conflicts of interest, both real and perceived.

A conflict of interest could exist where:

• trustees have a personal interest (financial or otherwise) that could lead a reasonable person to think that they could be influenced in the way that they carry out their Trustee duties
• a trustee has a current or recent relationship with a service provider or potential service provider that could lead a reasonable person to think that the trustee could be influenced to provide preferential treatment in the award of a contract or in the purchase of goods or services
• a close relative has a personal interest (financial or otherwise) that could lead Trustees to be influenced in the way that they carry out their duties or could lead a reasonable person to think that Trustees could be influenced.

The strategies which the Board has adopted to manage conflicts of interest require that trustees, and other Members of committees, must disclose at every meeting whether there has been any change to their personal circumstances. In the event that a Trustee, or other person covered by the code of conduct, declares a potential conflict or interest, the Board (or the Committee as the case may be) will determine the extent to which that conflict or interest exists and the method of dealing with the conflict. For this purpose the Board (or Committee) will determine:

a) whether the trustee, or person covered by the code, should be permitted to remain in the room whilst the Board determines whether a conflict exists

b) where a conflict or potential conflict is found to exist, whether that trustee (or other person) is permitted to be present during any deliberations regarding the issue or matter which gave rise to the conflict or potential conflict

c) whether the Trustee (or other person) is permitted to take part in any decision of the Board in relation to the matter under consideration.

Whistleblower protection

Part 9 of the Corporations Act and Part 29A of the SIS Act establishes a framework which is designed to encourage officers, employees and contractors of the Board to report general misconduct or suspected breaches of the Corporations Law to the relevant Regulator. Specifically it provides that officers, employees and contractors cannot be victimised when they report general misconduct or suspected breaches in good faith and on reasonable grounds. Additionally any disclosure made in good faith does not expose the person to any civil or criminal liability for making disclosure. No contractual or other remedy can be enforced or right exercised on the basis of the disclosure. It is the Board’s view that similar protection should be afforded to persons who in good faith report breaches of the Board’s code of conduct.

Trustees and employees of the Board are encouraged and have a responsibility to report any matters that they believe, on reasonable grounds:

• to be a breach of Corporations Law
• may cause financial loss to the Board
• may damage the Board’s reputation
• to be behaviour that is not in keeping with the Board’s code of conduct.

The Board is committed to protecting all genuine whistleblowers against reprisal action not just those making what are called ‘protected disclosures’. These are disclosures relating to breaches of the Corporations Law made in good faith and on reasonable grounds provided that certain criteria are met. These criteria are reflected in the Board’s policy. Neither the Board’s commitment nor the statutory protection extends to shielding whistleblowers who themselves are involved in the reported improper conduct.

The intention of the Board’s whistle blowing policy is to encourage:

a) effective compliance with relevant laws

b) efficient fiscal management

c) healthy and safe work practices

d) effective management, including unbiased decision making.

The Board’s Code of Conduct outlines the Board’s principle statutory obligations and documents standards required of Trustees and also staff of the Board. While the Board cannot offer statutory protection to those who report a breach of the Board’s Code of Conduct as distinct from a breach of Corporations Law it is, nonetheless, the Board’s intention that Trustees, staff of the Board and contractors should be able to report in good faith and on reasonable grounds suspected breaches of the Board’s Code of Conduct without fear of reprisal.

Review of Corporate Governance of Statutory Authorities and Office Holders (the Uhrig Report)

In November 2002 the Government announced a review of the corporate governance of statutory authorities and office holders. Mr John Uhrig was appointed to conduct the review and on 12 August 2004 the Government released its response to Mr Uhrig’s report. In that response the Government agreed that Ministers are to assess their portfolio bodies against the governance templates of the Uhrig Report and implement any improvements to existing governance arrangements that may be required.

During 2006–07 the Minister for Defence initiated a review of the existing governance framework for the Board against the criteria proposed by the Uhrig Report. Based on that assessment the Minister concluded that the existing board template is the preferred governance framework for the Board for the following reasons:

a) the Board acts in a manner similar to commercial superannuation funds

b) the Board predominantly undertakes commercial operations

c) the trustees have ‘full power to act’ within the constraints of the legislation and the Minister’s power is limited to the appointment and removal of trustees and to request information from the Board

d) the assets of MilitarySuper managed by the Board belong to the Members of the Fund, rather than the Commonwealth and the Board is able to acquire and dispose of assets in its own right

e) the Board has executive support staff engaged outside the framework of the Public Service Act.

The assessment concluded that the Board should continue to operate outside of the governance frameworks established by the Commonwealth Authorities and Companies Act 1997 and the Financial Management and Accountability Act 1997, but recommended that further consideration is given to finding an appropriate governance model that enables the Board to handle public money and operate with a higher degree of financial independence. The assessment also recommended that all Board appointments be limited to a period of three years (with eligibility for reappointment) and that a Ministerial statement of expectation, taking the form of an annual letter from the Minister to the Board, be introduced – with the Board’s response forming a statement of intent. Both statements are required to be made publicly available once issued.

Merger of the Boards of the Major Commonwealth Superannuation Schemes

In a joint media release dated 31 October 2008 the Minister for Finance and Deregulation and the then Minister for Superannuation and Corporate Law announced the Government’s decision that ARIA (the trustee for the Government’s superannuation schemes for its civilian employees) the MSB Board and the DFRDB Authority merge to form a single trustee board from 1 July 2010.

The schemes for which the new Board will have responsibility are:

• The Commonwealth Superannuation Scheme (CSS) – both 1922 and 1976 Acts
• The Public Sector Superannuation Scheme (PSS)
• The Public Sector Superannuation Accumulation Plan (PSSap)
• The Military Superannuation and Benefits Scheme (MSBS)
• The Defence Force Retirement and Death Benefits Scheme (DFRDB)
• The Defence Forces Retirement Benefits Scheme (DFRB)
• Certain closed PNG schemes.

The trustee board consolidation decision is seen by Government as part of an integrated package of measures aimed at a modernised and improved framework for Australian Government superannuation, more in line with arrangements in the broader superannuation industry in Australia. The package aims to provide improve efficiency of the trustee arrangements and services to Members of the schemes.

The Government has provided an assurance that the reforms will not affect Members’ superannuation benefits and entitlements in any way. Each scheme will retain its own rules, including investment strategies and Member investment options.

With this objective in mind the MSB Board and its Executive are working closely and co-operatively with the Department of Finance and Deregulation, the Department of Defence, the DFRDB Authority and ARIA on all aspects of the merger to ensure that the outcomes from this process continue to meet the special needs and expectations of all Members of each scheme.

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Business plan

The Board’s Business Plan (the Plan) sets out the main objectives of the Board. For each of the five significant areas of Board’s activity and responsibility, namely investment, scheme administration, communications, compliance/corporate governance and people, the Plan describes the key objectives, measures and performance indicators identified by the Board for each of the focus areas.

The Plan identifies areas of Board responsibility and accountability and articulates the framework of internal and external governance measures employed by the Board to ensure that those responsibilities and accountabilities are properly discharged. It identifies environmental and other factors which will impact on the Board’s responsibility for the administration of the Scheme and the management and investment of Members’ moneys which comprise the Fund. The Board’s approach to control of the main business risks is also covered. From an investment perspective the Plan has regard to the current membership and liabilities of the Scheme and makes some assumptions regarding the future growth of the Scheme given the ever-changing superannuation environment. As such, it provides the basis for monitoring long term Fund performance, having regard to market influences and the changing demographics and needs of Scheme Members. The Board reviews its business plan each year.

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Scheme administration

The Commissioner for Superannuation and, through that office, Commonwealth Superannuation Administration (ComSuper), is the legislated provider of scheme administration services to the Board. The cost of these services is met by the Department of Defence. Recognising that it is not currently possible to create any legally binding or enforceable arrangements between the parties, a Service Level Agreement has been negotiated covering arrangements between the Defence Organisation (comprising the Department of Defence and the Australian Defence Force), the Board and ComSuper. This agreement reflects the shared understanding of the commitments each of the parties is providing under the agreement. These are matters which would otherwise be reflected if the parties were able to contract with each other.

An important factor impacting on the achievement of Scheme objectives is the financial environment within which the Scheme is administered. Under the Act, the costs of administration of the Scheme, other than the costs of, and incidental to, the management and investment of the Fund, are met from moneys appropriated to the Department of Defence. The Department in turn purchases administration services from ComSuper.

Objectives

The Board’s administration objectives are to have continuing access to high quality, cost effective administration services which meet the needs of the Board and Members of the Scheme by:

• having executive support services which efficiently and effectively respond to the Board’s needs
• delegating Board powers and functions under the Act and Trust Deed to ComSuper, in order to facilitate good service to Members
• having arrangements with its major service providers which ensure that each party is accountable for their own acts and that the assets of the Fund are protected
• having access to ongoing sources of funding to ensure that the costs incurred directly by the Board in pursuit of its responsibilities for the administration of the Scheme, other that in respect to its responsibilities for the management and investment of the Fund, are met by the Department of Defence
• having processes in place which enable the Board to influence the standards of services provided to Members
• managing key relationships with stakeholders and service providers
• having clear-cut and streamlined administration at competitive costs commensurate with above average service levels.

As part of its wider review of Australian Government superannuation arrangements, the Government commissioned a scoping study to review the current approach to the administration of the Australian Government’s main civilian and military superannuation schemes. The aim of the review was to identify business options to improve the efficiency and effectiveness of the administration of those schemes.

At the time of preparation of this Annual Report the Government had made no announcements regarding the outcome from that scoping review or the impact on future superannuation administration arrangements.

Delegations

The Board has delegated the majority of its general Scheme administrative powers and functions to the Commissioner for Superannuation and to ComSuper staff. The major areas of delegation include the maintenance of Membership records, the receipt of Member and employer contributions and the calculation and payment of benefits.

Certain powers are retained by the Trustees. These include reconsideration of Board decisions, extending the period of time in which a person affected by a decision may seek reconsideration, and cases involving the application of the legislation which produces a result not in keeping with the spirit of the legislation.

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Board committees

Audit and Risk Management Committee

he Audit and Risk Management Committee is a committee of the Board. As at 30 June 2009 the Committee comprised Mr Gabriel Szondy (Chairman), WOFF Robert Swanwick and Mr Felix Bleeser.

The Committee was established to advise the Board on accountability and audit-related matters. It operates as a check on the Board’s own accountability arrangements as well as on the management practices of the Scheme Administrator, Fund Investment advisers and managers, the Custodian and other service providers.
The role of the Committee encompasses the Board’s responsibilities for risk management. Primary responsibilities of the Committee are to assure the Board that:

• its financial statements are derived from appropriate accounting systems and methods and reflect current accounting standards
• the audit arrangements within service-providing agencies are operating effectively
• appropriate audit and fraud control strategies are in place to protect Board and Member interests
• proper assessment of risks is carried out for consideration by the Board.

The Committee met on four occasions during the year.

The Committee has appointed the accounting firm PricewaterhouseCoopers (PwC) to act in the role of Audit Adviser. PwC is also the Board’s taxation consultant and tax agent. In assisting the Board in meeting its prudential and fiduciary responsibilities, PwC:

• provides advice to the Board on significant industry-wide developments
• undertakes a program of independent audits of aspects of scheme administration, risk management and internal control structures
• assists in the annual review of the prudential and regulatory requirements of the Fund and the Trustees
• reviews annual financial statements.

At the request of the Board, PwC also undertakes specific reviews of the Board’s various service providers.

PwC has also been appointed as the Board’s taxation adviser.

Investment Committee

For a number of years the Board operated an Investment Committee. During 2008–09, the Committee comprised all five trustees, with Mr Tony Hyams as Chairman.

The primary objective of the Committee was to act as a stimulant in the promotion of new investment ideas and concepts and to act as a filter for those investment ideas and concepts. Its primary role was to advise the Board on investment issues and related matters central to the Board’s functions of managing and investing the Fund. It acted as the point of contact and focus between the Board and its key external advisers on investment matters.

Following changes to the nature of the investment environment affecting a number of investments, and unrelated changes to investment advisory arrangements, the Board determined that the operations of a separate Investment Committee was no longer the preferred approach. As a consequence the role and responsibilities of the Committee were subsumed by the full Board. The Board continues to be supported in its investment operations by independent investment advisers and its Executive.

Military Superannuation Communication Committee (MSCC)

The Military Superannuation Communication Committee is a committee of the Board.

As at 30 June 2009 the Committee comprised Brigadier Bob Brown (Chairman), WOFF Robert Swanwick, Mr Craig Scarlett (representative of the Department of Defence) and CMDR Roz Fletcher (representative of the DFRDB Authority).

The primary objective of the Committee is to act as an advisory body to the Board in relation to ensuring the Board meets the information disclosure requirements flowing from the Board’s AFS Licensing obligations and as otherwise imposed by the SIS Act. This is done through clear, timely and accurate reporting to Members and ensuring that Members are informed of Board decisions and other developments which may affect Members’ interests.

It also provides a forum by which the communications activities of MilitarySuper can be coordinated with those related to Members and beneficiaries of the DFRDB Scheme. The Committee is, therefore, the point of communication between the Board, the DFRDB Authority, the Department of Defence, the scheme administrator and other service providers for communication issues relating to Members and beneficiaries of the MilitarySuper and DFRDB schemes.

The Committee met six times during the year.

Reconsideraton Committee

As at 30 June 2009, the Committee comprised Mr Phil Charley (Chairman and representative of the Board), Colonel M Charles (representative from a service office), Brigadier Peter Bray AM (pensioner representative) and Ms Karen Moloney (representative of ComSuper).

The Committee’s role is:

• to consider requests for reconsideration of a delegate’s decision made under the MSB Rules and either affirm the decision, vary it or set it aside and substitute another decision for it
• to make recommendations to the Board in respect of requests for reconsideration of decisions made either by itself or the Board under the MSB Rules.

The Committee met in person on 11 occasions and considered several cases out of session during the year.

Complaints Committee

The powers of the Reconsideration Committee are limited to reconsidering decisions made under the Rules and do not currently extend to decisions made under the Act. Pending legislative change to remove this restriction, the Board approved the establishment of a Complaints Committee, with the same Membership and Chairman as the Reconsideration Committee.

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Executive

The role of the Executive is to provide high level support to the Board in meeting its responsibilities for the administration of the Scheme and the management and investment of the Fund. The Executive has overall responsibility for the management of the Board’s day-to-day operations and the management of the Board’s relationships with its key service providers and stakeholders.

The focus of the Executive during 2008–09 continued to be on the enhancement of in-house capabilities in areas of governance, compliance, scheme administration and investment implementation and monitoring.

In investment matters the Executive is:

• the central co-ordinator of activities related to asset allocation, cash flow management, oversight of the calculation of daily and monthly Net Asset Value (NAV), daily unit prices, provision of instructions to the custodian, legal due diligence and negotiation of investment management agreements and legal contracts, mandate and SIS Act compliance
• responsible for treasury management, daily monitoring of portfolio performance, reconciliation of custodian reporting and asset valuation, unit pricing and for providing consolidated performance reporting at portfolio and asset sector level, as required by the Board
• solely authorised to issue instructions for the purposes of implementing the Board’s investment decisions and to sign documents for that purpose
• co-ordinator of the actions required for the transition of assets between sectors and/or managers
• the link and manages the relationships between the Board and its advisers, fund managers and custodian.

On administration matters the Executive:

• manages the relationships between the Board and the Department of Defence (as employer sponsor and on policy matters), the Administrator (ComSuper), External Auditors and the Board’s independent audit and tax advisors, and legal counsel
• performs the function of Responsible Manager under the Boards AFS and APRA licences and monitors and manages the Board’s obligations as licencee
• monitors the services provided by ComSuper to ensure compliance with the SIS Act, Corporations Law and the Board’s licencing obligations
• advises the Administrator on Scheme administration issues and provides direction as required
• provides secretariat support service to the Board and its committees
• maintains records of meetings and provides instruction to initiate decisions of the Board
• oversees the preparation by ComSuper of monthly, quarterly and annual Scheme financial statements
• manages the payment of Board administrative expenses and prepares Board financial statements on a monthly, quarterly and annual basis
• participates as a Member of the Single Board Merger project liaison working group formed to provide a forum for communication between the key stakeholders and to assist in facilitating a smooth transition to the new single board arrangements to be implemented by 1 July 2010.

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Financial issues and budget strategies

Section 25 of the Act prescribes that the Board must pay all moneys received by it in respect of the Fund into an account maintained by it with a bank. Clause 9 defines the assets that comprise the Fund. Moneys related to the administration of MilitarySuper are appropriated to the Department of Defence which pays ComSuper a user charge based on a negotiated annual Scheme administration fee. The fee includes a component for administering the Scheme on the Board’s behalf and a component for costs incurred by the Board and it’s Executive in respect of their administrative activities. ComSuper provides the Board with a notional budget in relation to that second element, which includes moneys that are recoverable from the Fund in accordance with the legislation.

The Service Level Agreement negotiated between the Board, the Department of Defence and ComSuper establishes the services and standards of service to be provided in relation to the administration of MilitarySuper. Although the Board, through its Executive, participates in and influences the level of services to be provided, the costs of delivering those services are negotiated between the Department and ComSuper. As previously stated, the Board believes that this is an undesirable situation as the Board, though legislatively responsible for the administration of the Scheme, is not financially accountable for the costs of that administration.

Consequently the Board remains strongly of the view that it should be in a position to influence both the level and cost of administrative services provided in the administration of the Scheme to the benefit of its Members. The Board continued to make its views known to the Minister, Government and the Department of Defence on the implementation of changes which it sees as central to the proper functioning of the Board in the discharge of its responsibilities for the administration of the Scheme.

The Executive and the Scheme Administrator, ComSuper, have identified a number of administrative errors which have raised concerns about the operating systems used for scheme administration. ComSuper has implemented manual processing for a small category of administrative functions pending the implementation of a number of system ‘fixes’ to affect permanent solutions. It was ComSuper’s intention to migrate existing legacy systems to a single operating platform covering all the Commonwealth Schemes it administers. The Board had considered the identified shortcomings of the existing CAPITAL system to be areas of increased business risk to MilitarySuper. As a result the Board revised it’s risk assessment and implemented an enhanced program of audit review.

During the course of the year the Government withdrew funding approval for the ComSuper IT Modernisation Project, which had been intended to address identified areas of deficiency in the systems used by ComSuper for scheme administration. As described earlier in this report, as part of its wider review of Australian Government superannuation arrangements, the Government commissioned a scoping study to review the current approach to the administration of the Australian Government’s main civilian and military superannuation schemes. The aim of the review was to identify options to improve the efficiency and effectiveness of the administration of those schemes.

The impact on future scheme administration arrangements cannot be determined until the outcomes from that review and any decisions by Government in relation to it are released. However, it remains the Board’s firm commitment to ensure that whatever the outcome, Members of MilitarySuper continue to have access to high quality administration services.

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Status under the SIS Act and corporations legislation

MilitarySuper is a regulated superannuation fund under the SIS Act. The Board has established extensive compliance arrangements to ensure that operational and legislative changes are independently reviewed to assess their impact against the SIS Act requirements and to ensure that ComSuper’s practices remain in concert with the SIS Act legislation. In response to the Government’s Financial Services Reform initiatives the Board applied for and was granted (with effect from 16 February 2004) an AFS Licence covering the provision, by the Board and its Authorised Representatives, of general financial product advice.

These requirements have added a significant additional layer of compliance obligations to the Board’s administration of the Scheme and have changed significantly the relationship between the Board and ComSuper. Although the Act remains the primary determinant of the relationship, under the AFS licensing arrangements staff of ComSuper must be appropriately trained and, provided they meet the required competency requirements, be authorised directly by the Board under its licence to provide general financial product advice.

To meet the Board’s obligations as licensee, a detailed process of compliance reporting has been implemented by which the Board can obtain assurance that the Commissioner for Superannuation (and through him ComSuper) has appropriate processes and controls in place to ensure that the Board’s licensing obligations are being met.

The Board was also granted an APRA Licence with effect from 26 September 2005 and the Fund became a Registered Entity for APRA licensing purposes. In accordance with it’s licence obligations the Board is required to report breaches to the appropriate Regulator. During the year the Board’s administrator reported a number of administrative errors which were required to be reported.

Product Disclosure Statement

One of the key requirements of the Financial Services Reform legislation is for MilitarySuper to issue a Financial Services Guide (FSG) and a Product Disclosure Statement (PDS). The FSG explains what financial services the Board provides for MilitarySuper and who delivers them, and can be found on the MilitarySuper website.

The Product Disclosure Statement for MilitarySuper consists of the following two documents:

• Your Guide to Investment Choice
• The MilitarySuper Book

Together these documents describe all the main features of MilitarySuper. Members are provided with these documents on joining MilitarySuper together with the latest Annual Report to Contributing Members. Electronic copies can be obtained from the MilitarySuper website. Hard copies can be ordered online.

Financial product advice the Board can provide

The Board is licensed to provide general financial product advice. General financial product advice means that the Board has not considered the Member’s individual objectives, financial situation or needs in providing the information or advice. If Members wish to have financial product advice in circumstances where the provider of that advice has considered one or more of a Member’s objectives, financial situation or needs, the Member is advised to consult a licensed financial planner.

The only kind of financial product the Board is licensed to provide, and in respect of which it may provide financial services, is the Military Superannuation and Benefits Scheme (MilitarySuper). In providing its authorised services, whether directly, or through its authorised representatives, the Board is acting for itself. Entitlement to join MilitarySuper, and benefits derived from it, are determined by the Act and Rules.

General product advice provided by authorised representatives of the Board

General financial product advice can also be provided by authorised representatives of the Board who are employees of Commonwealth Superannuation Administration (ComSuper) ABN: 77 310 752 950. Authorised representatives are trained to provide general financial product advice in accordance with the standards set out in the Australian Security and Investments Commission’s Policy Statement Number 146 (PS146). The Board’s Chief Executive Officer and Compliance Manager have been appointed ‘Responsible Managers’ for the purposes of the Board’s AFS licence and several other staff have undertaken training to enable them to provide general financial product advice in accordance with PS146.

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Evaluation

Annual effectiveness reviews

The Board conducts an annual effectiveness review of its own operation as a Board, its Executive and all its major outsourced service providers as part of its annual business planning process.

In addition, the Scheme’s internal auditor undertakes a review of one major service provider (the Scheme Administrator, Custodian and Asset Consultant/Adviser) each year, so that all major service providers are reviewed once over a three year cycle. The performance standards referred to in this report are those defined in the current administrative agreement. Performance against the standards, and the standards themselves, are the subject of ongoing annual effectiveness reviews.

Client feedback

During 2008–09 the Scheme Administrator continued to conduct Member satisfaction surveys with the assistance of the Canberra-based firm Orima Research. Members who had recent contact with the Scheme were surveyed once during the year. The quality of services surveyed was consistently rated highly by Members.

The Quality Service Index (QSI) for military Members (both MilitarySuper and DFRDB schemes), introduced to measure the survey results and to enable comparison between survey periods, currently ranks in the region of an 80% satisfaction level. Chart 1, which shows ComSuper’s QSI scores for the Military Membership in each of the twenty-four survey periods since data collection began in 1997–98, shows a consistent level of Member satisfaction within the 80–85% range.

The survey results are considered by the Board, its committees and the Scheme Administrator and feed into a continuous improvement process. Action plans are derived and reported against, and, wherever possible, enhancements made to procedures and communication products as a result of the survey feedback, with the key objective of improving Member service.

Quality Service Index (QSI) scores for military member satisfaction