The coming year promises to be another busy one for the superannuation industry, with ongoing changes in the financial sector and superannuation policy that will impact the industry at a strategic and operational level. In such a rapidly evolving environment, superannuation boards and senior management need to have in place robust processes for setting their strategic direction, establishing business plans, and reviewing their operations, services and performance against appropriate benchmarks.
Strategic and business planning
Some RSE licensees have developed rigorous and proactive strategic and business planning processes. In other cases, however, APRA has observed strategic and business planning that has more focus on ensuring compliance with legislation than addressing core strategic and operational needs, or is not based on adequate forward-looking analysis. Further, when planning frameworks are weak, monitoring performance against plans and instigating corrective actions when targets are not met are also likely to be lacking.
Weak planning and monitoring processes are unlikely to serve boards – or their members – well in effectively responding to the challenges of the evolving industry and environment. The industry can therefore expect APRA to delve more deeply into strategic and business planning processes as part of our future supervision activities.
Governance, risk culture and conflicts management
In December 2015, APRA issued a letter in response to feedback on proposed changes to our governance prudential standards and guidance, setting out APRA’s views in relation to governance frameworks and director appointment processes, including tenure limits and board size. These changes will be formally reflected in the prudential framework at the earliest opportunity.
APRA’s experience to date suggests that many practices in these areas, as well as board performance assessment processes, leave room for improvement. Some boards appear larger than optimal; some have no tenure limits, or don’t apply them in practice; processes used to assess skill gaps within the board are sometimes limited, with appointment processes not always having regard to the skills and capabilities required; and board performance assessment processes often rely substantially on self-assessment, with limited follow-up actions.
During 2016 APRA plans to undertake a thematic review of superannuation industry practices in relation to director appointment and board performance assessment processes. Alongside similar work in other industries, this will help move all APRA-regulated superannuation boards towards sound governance practices in these critical areas.
APRA will also be following up its 2014 review of conflicts management, which identified oversight of related party arrangements as a particular area of weakness in superannuation industry practices. APRA will therefore be reviewing more deeply, for a sample of funds across all industry segments, practices in relation to the management and oversight of different types of related party arrangements.
During the first half of 2016, APRA will complete its thematic review of investment governance practices and provide feedback to industry on better practices and areas for improvement.
As with all such reviews, we are seeing a wide range of practices. Broader industry investment governance practices are reasonably sound and steadily improving. However the results of stress testing and liquidity contingency planning are often not as closely linked into investment decision-making processes as they should be. There appears to be a relatively narrow perspective taken on investment risk by some boards, focusing on performance outcomes without regard to broader aspects such as aggregate exposures and operational or implementation risks. Stress testing by some funds tends to focus on generic historical scenarios rather than forward-looking scenarios more specific to the fund’s circumstances, and liquidity stress testing practices vary widely.
Another area on our radar is trustees’ response to the persistent low interest rate environment. This clearly has implications for investment strategies and any change in risk appetite needs to be well understood and managed. Boards may also need to review their return targets and related investment risk measures.
The agenda for the superannuation industry over 2016 and beyond remains full. Each board needs to respond to strategic issues and the change agenda, while also effectively managing their core operations. This article highlights some focus areas for APRA over 2016. Our goal remains to lift standards of practice across the industry; that should align with the goals of superannuation industry stakeholders.
Helen Rowell is deputy chairman, Australian Prudential Regulation Authority.