Insights / December 21st, 2017

APRA consults on the future of superannuation

The consultation comes hot on the heels of a speech delivered recently by Deputy Chairman of APRA, Helen Rowell, which set out a vision for the superannuation industry as “stronger, more sustainable, more resilient and consistently delivering better outcomes for those it’s designed to serve”.

According to Ms Rowell, the forecast for the next 5 years in superannuation includes a trend of further industry consolidation following a loss of 106 superannuation funds over the past 5 years. Smaller funds face challenges in a contraction of membership, higher operating costs and lower returns. While bigger may not always be better, APRA has identified a correlation between scale, future viability and member outcomes. Limited resources can mean tough decisions about how to deliver quality outcomes for members.

While the number of funds is decreasing, the amount of funds under management is growing and Ms Rowell says that, if trends continue, the industry will be managing approximately $4 trillion on behalf of Australians by 2022.

Meanwhile, Australian fund members have approximately 41,000 investments options at an average of 196 options per fund. This level of choice may be “more a headache than a help” from the members’ perspective, especially when many of those options appear very similar. Ms Rowell’s view is that reduction in the number of investment options is likely to reduce fees and fund administration costs.

APRA has previously indicated to the industry that some trustees and funds appear to be insufficiently prepared to manage industry challenges, including increased competition, changing demographics amongst fund members and low return on investment.

With that in mind, APRA is working towards finalising its proposed revisions to the prudential framework by mid-2018, with the new requirements coming into effect from 1 January 2019. The proposals aim to lift the standards of practice across the superannuation industry and to better protect the interest of beneficiaries.

Quality, value for money outcomes for fund members is a key aim for APRA’s proposed revisions, with better governance, more transparency and better expenditure management identified as important drivers of better member outcomes.

Delivering sound outcomes for members

The framework enhancements will require Registrable Superannuation Entities (RSE) licensees to bolster strategic and business planning practices, and expense management, which will lead RSE licensees to define, assess and deliver quality outcomes for their members.

APRA is of the view that there is room for improvement where expenditure management is concerned, with inadequate expenditure processes and oversight potentially incurring costs which adversely affect member outcomes. To encourage rigorous decision making, RSE licensees will be required to develop and maintain an expenditure policy which will demonstrate how expenditure is linked to delivery of sound member outcomes.

APRA also proposes that RSE licensees be required to annually assess member outcomes in both absolute terms and relative to other RSEs and objective benchmarks. The assessment will be a key part of strategic and business planning processes.

Superannuation reporting

In addition to legislation currently before parliament, APRA is considering further changes to superannuation funds’ financial reporting to address areas of improvement to data on expenditure. While the application of Australian Accounting Standard 1056 to RSE licensees from 1 July 2016 is expected to improve data quality, APRA has concerns that problems regarding depth, accuracy and comparability of expense reporting will not be resolved. APRA is considering requiring more consistent data reporting measures, with more granularity in expense data collection and “look-through” powers for capturing data about service provider expenditure.

A stronger reporting and disclosure regime to create greater industry transparency is hoped to allow industry, regulators and the Australian public to make meaningful comparisons between the funds on offer. This is intended to encourage competition between funds and push better member outcomes, as well as rewarding high performing funds which deliver strong returns and quality service.

Simplifying insurance opt-outs

RSE licensees are required to provide default levels of life and total and permanent disability insurance on an opt-out basis in MySuper products which were introduced by the Federal Government as a simple, low cost product to replace existing default superannuation products.

In response to a wide range of opt-out processes across the industry and public concerns about the complexity of the framework, APRA proposes to require RSE licensees to provide simple and straightforward opt-out processes for insurance products.

APRA believes that as a result of its proposed framework changes, the sustainability of superannuation will improve over the next five years, with greater clarity on APRA’s expectations enabling fund trustees to better meet the needs of their fund members.

APRA’s proposals are independent of legislative proposals before parliament. Ms Rowell’s speech, the discussion paper and draft prudential standards are available on the APRA website for consultation. Submissions should be provided to APRA by 29 March 2018.

If you need more information or would like to discuss this further, please do not hesitate to contact Hillary Ray or someone from our Financial Services Team.