Ross Jones believes the world of superannuation is in a good place. “We’ve gone from what was sometimes described by people as well-meaning amateurs to a sophisticated and professional industry in the space of a decade. And that’s something the industry can be proud of,” he says.
It is in such a good place that as of July 1, 2013, a significant date because Stronger Super comes into effect, Jones completes his second and final term at the regulator.
The reason he cites for his departure is the need for renewal. Like the funds he supervises, good governance and board renewal is important for the Australian Prudential Regulation Authority (APRA).
“I believe that there are opportunities for new expertise to come into APRA as a consequence. And 10 years has been great.”
As chair of the International Organisation of Pension Supervisors and vice chair of the Organisation for Economic Cooperation and Development Working Party on Private Pensions, Jones believes Australia stands out globally in governance.
“We have an industry that understands its obligations, an industry that’s generally honest, responsible and capable.“
It’s also an industry that seems to have received him well, particularly during this period of reform.
Speaking to some within the institutional sector, it’s clear that Jones has proven himself approachable, knowledgeable and candid. It’s a cooperative approach that Jones himself talks about a great deal.
“It works best for us to have a positive engagement with the people whom we supervise. We need to work on a relationship of trust, we need the industry to be able to come to us and say, ‘We have this particular problem’ if that’s the circumstance.
“As a regulator, you don’t like surprises, and the industry doesn’t like surprises either,” he says, adding that it’s the industry’s expertise that can ease the challenges of new regulation.
Jones’ position is also one that many acknowledge has been a tough one. The APRA team working on the Stronger Super reforms is undoubtedly working hard to meet legislative deadlines and inform an entire industry of its new obligations.
Jones, however, says it’s rewarding seeing the culmination of a very substantial reform process.
“APRA had believed for many years that we had a regulatory gap, and that gap has now been filled by the government giving APRA the standards-making powers.
“We actually believe that we will be far more effective in supervising Australia’s superannuation funds than we have been in the past. And given the size of the industry, it’s a valuable thing.”
The go-to guy
In conversation with Jones, it’s interesting to observe the way in which he responds to questions. He’s direct, at times forthright, and yet, occasionally he breaks out into a grin, displaying a passion for his work that suggests he’s truly invested in making the industry a stronger one.
As Jones notes, Australia’s super system is a compulsory one, under which people quite appropriately have expectations of an effective industry.
“The regulator, the funds themselves – all should be working to achieve the best outcome, which is to maximise retirement income,” he says.
“And under a compulsory system, the obligation is even greater than it is under a voluntary one. Under a voluntary, you can opt out. People here don’t have any choice. So we as the regulator, and the industry, has an obligation to ensure the best possible outcomes. And, I think, to a large extent the industry works fairly effectively.”
Swings and roundabouts
Developing and implementing behavioural standards, which Jones emphasises is what APRA is here to police, has delivered its share of rewards and challenges. Jones concedes that, while the general objective has been fairly clear from the start, the process has sometimes been less so.
Jones is referring primarily to the legislation covering Stronger Super. Created in four tranches, he says it requires more coordination of the political and regulatory processes than normal.
“Because you focus very much on a deadline and you’ve got a legislative process as well, it has been, at times, fairly complex. And it has been a process that requires a lot of consultation in the sense that everyone can agree on what the objectives are, but to use that old cliché, quite often the devil is in the detail, and the details in the retirement income system are extremely important.”
There’s some flexibility, says Jones, pointing to the delay in implementing new statistical collections. He adds the reminder to superannuation funds that APRA doesn’t impose the deadlines – it comes from legislation. It’s a significant point given the confusion that can befall a fund not paying close attention to the new requirements. While there’s no cut-off date for MySuper applications, after October, funds without MySuper authorisation will not be able to accept default income.
It’s not the end of the world, Jones notes, but a lot of the major funds want a piece of default-sector pie and already have their applications in. And the funds that sought APRA’s engagement early on in the process are enjoying a smoother ride.
“As you’d expect, the people who came in with their MySuper applications early on, generally speaking were the people who were most prepared. The people who talked to their supervisors in the lead-up to Christmas, there were no real surprises with most of those.”
That Jones warns funds of complacency when it comes to applications isn’t surprising. At CMSF earlier this year, he delivered a big watch-out speech, signalling that the lead-up to July 1 is a crucial time for funds still sitting on the default-fund fence. The issue, Jones says, is that they may end up having to deal with more substantive issues than anticipated.
The number of MySuper applications has fallen below expectations, as Jones revealed at CMSF. An initial run-around with industry led to an estimation of 250 applications, a figure that has since been pared down to 100 to 120. But Jones says APRA has remained “agnostic” about the number of applications.
“It was simply that, statement of fact, when we first started talking to industry, I think a lot of participants were of the view that we must have a MySuper licence.Now some trustees are looking at it more carefully and saying, well, no, we can manage quite well without a MySuper authorisation.
“And as more information came out about MySuper, the generic and tailored products and so on, people realised they probably didn’t need as many of the variations as they might’ve thought they needed. And so bit by bit we’re changing. We still need to see where some of the corporates will go.”
Jones says there have been no real surprises so far, but jokes that “we’re not there yet”.
“Ask me in a couple of months’ time when applications come in from people that we’ve not had any engagement with. You might get a different response.”
Consolidating an industry
That there will be a sizeable shift in default funds is clear, and Jones acknowledges the industry will be changing, and that there will be more industry consolidation.
“I don’t think that this is necessarily the catalyst, but there will undoubtedly be more mergers. We’re seeing industry consolidation all the time. Compared to many other parts of the financial sector though, it’s still relatively unconcentrated.”
It’s a consolidation that Jones says has been going on for a long time.
“When we did the first set of super licensing, which was 2004 to 2006, that led to the number of trustees going from around 1200 to something like, say, 350. That was in two years, from mid-2004 to mid-2006. A lot of trustees left the industry during that first licensing period,” he says.
“I don’t necessarily think that MySuper will speed up the consolidation process… it forces people to stop and think, which is very useful.”
Jones rejects speculation that downsizing the industry is APRA’s objective in order to have fewer funds to police.
“APRA’s objective is to get the best possible outcome for members. Now if it turns out… there are substantial benefits to members from fewer larger funds, then of course that’s good.”
Rather, the regulator is setting its target firmly on the scale of funds, more particularly, their performance.
“If you are small and you are an outstanding performer, we’re quite happy to supervise you, we’re quite happy for you to be small. There’s no problem at all.
“The problem is with people who have poor performance, and their poor performance is caused by a lack of scale.”
In relation to how smaller funds will cope with the costs of compliance, Jones acknowledges that fixed costs mean greater costs for the funds. But he says it’s the case in any regulated industry where the costs aren’t variable.
“I’m certain that the overall cost of complying with statistical reporting may be roughly the same for a big firm as a small one. But clearly, if you have a much smaller number of members, it’s going to be spread over a smaller number of people.