The Australian Prudential Regulation Authority (APRA) has provided its much-awaited clarification on the reporting requirements for regulated superannuation entities (RSE). While it reduces some of the burden of earlier drafts, the reporting requirements are still very significant and present some serious challenges to funds, their administrators and custodians.
However, in many respects, some of the key components align to where the industry has been heading, particularly with respect to improved transparency and oversight of externally managed investments.
Round-up of requirements
Some key outtakes of the final reporting requirements released by APRA on March 28, are:
- 35 reporting forms have been introduced that replace existing APRA reporting. Some forms are specific to the fund type (for example, MySuper, defined benefit fund) and consequently many RSEs will not be required to complete all forms.
- Reporting is undertaken in three levels: RSE licensee, RSE and investment option.
- 23 forms are to be completed on an annual basis and 12 on a quarterly basis.
- A number of forms require audit assurance, including some on a quarterly basis. In some cases only limited assurance is required, although further clarification is required on what this specifically entails.
- There is a new requirement to provide reporting on investments on a lookthrough basis, even when assets are held in an externally managed vehicle.
- There will be the requirement to produce a dashboard, although at the time of writing these requirements have not been finalised.
Accessing underlying investment data
While the requirement for reporting on underlying investments does not fully apply until reporting periods commencing on or after July 1, 2014 there are likely to be serious operational, practical and legal challenges associated with obtaining this data. For instance, in many cases the subscription agreements for alternative and/or offshore investments may not provide investors with the right to access this granularity of information.
Further, there is the question around the reliability and timeliness of this information, especially for those investments that are infrequently traded or valued.
With respect to this issue, we believe that RSEs need to review their portfolios now and identify what investments may be problematic to report on. Our view is that APRA will be accommodating, particularly where there is a legal or material operational constraint in accessing the required information. However, early and proactive engagement with them on this issue is important. Moreover, when investing in new investments, RSEs should take the necessary steps to ensure that managers are willing and able to meet these new reporting requirements.
Managing the audit process
Even though the audit requirements have been significantly paired back, management of the audit process will still present a challenge, particularly given the tight (and inflexible) reporting deadlines. Careful planning between RSE’s and their auditors will be required to ensure availability of audit resources, particularly given the competing demands of clients on limited audit resources.
RSE’s need to start this planning now noting that, even where this reporting may be outsourced to the administrator, it is clear that responsibility for management of the audit engagement will reside with RSE. Further, when compiling the reporting, RSE’s and their administrators need to ensure that appropriate documentation exists to support the results presented in the report. This could be particularly troublesome where the firm chooses to compile data outside of core systems. In fact, for this reason alone, using spreadsheets and other ad-hoc tools may not be an acceptable solution to manage the scale and complexity of this reporting.
Turning lemons into lemonade
It is clear that these reporting requirements represent an onerous and significant challenge to RSEs. In many cases, particularly where the RSE has an external administrator, the incentive may be to simply outsource this process to an external party and, other than discharging its fiduciary responsibility to sign off such returns, to retain limited internal involvement with this process.
Viewed in this light, it may be concluded that there is limited value in producing this reporting and consequently, as with all other overheads, the path of least resistance (such as delegating responsibility for preparation to the administrator) should apply.
Our view is that while collecting this information is driven by a regulatory need, much of the data required to support this reporting may have significant value. For instance, data on underlying investments – particularly those housed within opaque and often complex investment vehicles – provides valuable information to the trustees.
On this basis, the RSE should actively consider how this information may be repurposed for internal consumption. While the mechanical process for compiling this reporting may be delegated, we believe that the RSEs should retain active involvement in this process. Not only will this ensure that that they retain appropriate ownership of the APRA reporting process, but it will enable enhancement over the quality, depth and robustness of management and trustee reporting.
RSEs have been grappling for some time on how to improve their level of understanding over its investments, members and fund operations. To take a glass-half-full view of the new reporting requirements, it could be argued that this has provided the industry with the necessary impetus to tackle this issue.
What remains to be seen is whether the industry can see past this just being a compliance issue to one that can give a greater level of meaningful information to management and the trustees.
Bruce Russell is a director at Bridge, a specialist advice and project delivery firm to the financial services industry.