APRA implores an end to infighting

Helen Rowell

By

15/11/2017

The regulator clarifies how reforms will affect board composition, the scale test and transparency, for the common goal of better member outcomes.

COLUMN | The national conversation around superannuation is always lively, but it has been even more so of late, which is no surprise, given how much there is to talk about.

The federal government is advancing legislative bills to reform super fund governance arrangements and improve trustee accountability and member outcomes.

To supplement these reforms, the Australian Prudential Regulation Authority has proposed amendments to how we assess the performance of registrable superannuation entities (RSEs).

As the rhetoric ramps up in response to all the impending changes, it’s easy to forget that the government, super fund trustees and APRA all share the same ultimate goal: to improve outcomes for
fund beneficiaries.

Parliament will ultimately determine whether the government’s legislation passes as tabled. Still, it is a good time for APRA to clarify some aspects of how the expected reforms will probably affect trustees and outcomes for beneficiaries.

Board reform

APRA is on record as supporting the notion that more independent directors on boards can enhance decision-making by providing a broader pool of skills to draw on and promoting diversity of views.

There is no reason why this should alter a trustee’s business philosophy or model; nor does this reform target any one industry sector.

While some in the industry contend existing arrangements serve their beneficiaries well, that doesn’t mean an injection of independence wouldn’t produce even better decision-making and beneficiary outcomes.

Outcomes test

The government has said it will expand the existing scale test for MySuper products into an ‘outcomes test’.

APRA recognised several years ago that bigger wasn’t necessarily better when it came to super fund performance, and encouraged trustees to go beyond the minimum scale test assessments to consider a broader range of indicators of performance and sustainability.

A range of metrics APRA outlined in a letter to all RSE licensees on August 31 should already be front of mind for most trustees as they seek to optimise beneficiary outcomes and keep their funds sustainable.
The pending legislation largely codifies what APRA expects – and many trustees are already doing – in relation to MySuper products. But it will put additional pressure on outliers in terms of performance.

Modifying the prudential framework so an outcomes assessment applies to all APRA-regulated super funds, as outlined in APRA’s letter to RSE licensees on August 11, makes sense, given more than 60 per cent of Australians’ super is held in non-MySuper accounts.

In the case of both MySuper and Choice products, trustees are expected to compare their product’s performance against ones with similar investment risk profiles. The focus of the process should be on trustees identifying where their product may be underperforming and rectifying any shortcomings.

Increased transparency

Proposed changes to reporting standards aimed at giving APRA greater visibility
over fund expenditure have been interpreted by some as a crackdown on some types of payments to unions and employer groups.

This is not the case. Rather, the powers seek to ensure that all trustees can demonstrate that expense decisions were subject to an appropriately robust decision-making process and are in the best interests of beneficiaries.

If the introduction of greater transparency makes some trustees baulk at certain amounts or types of expenses, then that may speak for itself about the extent those payments were
truly in the best interests of beneficiaries.

Beneficiaries first

With Australia’s superannuation pie now worth more than $2.3 trillion, it’s inevitable any proposed changes will encounter fierce lobbying from those anxious to protect or expand their slice.

All trustees should be mindful of the optics of such a battle, and the damage it could cause to the industry’s reputation if trustees seem primarily focused on themselves.

As a principles-based organisation, APRA does not prescribe how trustees should structure their businesses or spend money. These are decisions for trustees and will remain so.

But by elevating the robustness and quality of trustee decision-making processes, APRA believes these reforms can deliver what all of us are seeking: better outcomes for fund beneficiaries.

Helen Rowell is deputy chair of the Australian Prudential Regulation Authority. She will address the 2018 Investment Magazine Chair Forum in January. For more information, please visit the event website, or contact Emma Brodie via [email protected] or +61 2 9227 5708.