The Australian Prudential Regulation Authority has launched a consultation on its proposed changes to the member outcomes test, designed to make superannuation fund boards more accountable.
The focus of the discussion paper, titled Strengthening Superannuation Member Outcomes, is holding trustees to higher standards for how they make decisions about spending members’ money on fund operations, including how they review whether it’s in members’ best interests for the fund to continue to exist.
APRA deputy chair Helen Rowell wrote to funds in August 2017 flagging the changes and the regulator has already identified 28 funds at risk of not complying with the new member outcomes test.
Rowell has issued a number of warnings that funds without a sustainable long-term business plan, based on realistic assumptions, will be under pressure to find a merger partner or face losing their default licence.
As previously flagged, APRA is now demanding funds improve their strategic business planning and implement more rigorous cost-benefit analysis procedures for all expenditures.
Funds should expect greater scrutiny of any related-party deals, a crackdown on flimsy business planning based on wishful thinking, and harsher criticism of weakly justified marketing, travel and other spending. Super fund boards will also be required to commit to a “contingency plan” for if strategy fails.
The package of changes, released on December 13, 2017, also includes a new requirement that funds make it easier for members to opt out of default group insurance arrangements.
Facing the future
The member outcomes test will enhance and replace the longstanding scale test, which requires all trustees to sign-off on an annual review stating they are satisfied the fund delivers appropriate value to its members and can continue to do so.
In launching the member outcomes test, APRA outlined concerns that some funds are ill-prepared to cope as Australia’s growing older population retires and withdraws its savings.
“RSE [Responsible Superannuation Entity] licensees increasingly face significant strategic challenges, including demographic changes, increasing account consolidation and an ongoing lower investment return environment,” the regulator stated. “These challenges, if not appropriately responded to, are likely to compromise both the delivery of appropriate outcomes to members and the financial soundness of RSE licensees’ business operations.”
Referring specifically to the impact of demographic trends, APRA noted that while the industry as a whole is expected to continue to experience growth, due to continued contribution flows and positive net investment returns, specific funds may no longer have a sustainable business model.
“Rates of growth in superannuation assets will vary across RSEs according to their different membership profiles, as members begin to draw down their savings,” the discussion paper stated. “Greater scrutiny on performance and efficiency, including investment management fees, administration fees and insurance premiums, will continue. As a result, products with higher-than-average costs will need to demonstrate that they are delivering commensurately better-than-average outcomes to justify their cost bases and remain competitive.”
The discussion paper noted that: “While many RSE licensees have embedded sound operational governance practices throughout their business operations, APRA’s supervision continues to identify weaknesses in the practices of some”.
A list of examples given cited:
- Strategic objectives and goals that are broad, with no timeframes or allocated resources or budget and no linkage to clearly stated business initiatives.
- Business projects or activities where the link to the delivery of sound outcomes for members appears limited or is not adequately demonstrated.
- Limited or no measurable indicators or metrics, or associated tolerances or triggers, to enable performance or outcomes to be tracked against objectives.
- Indicators and metrics that are inconsistent with the current position of the RSE; for example, a rapidly declining membership base.
- Failure to develop contingency plans and alternative future actions that would be taken in the event that adequate progress against key objectives or metrics is not achieved.
Group insurance changes
The requirement on funds to make it easier for members to opt out of default group insurance follows an edict issued by the Turnbull Government in July 2017.
In announcing the new requirement for ease in opting out, APRA also acknowledged the work of the Insurance in Superannuation Industry Working Group to develop a code of practice.
“Initiatives to address inconsistent opt-out practices through changes to the prudential framework and an Industry Code of Practice will contribute to improving the sustainability of insurance in superannuation and addressing public concerns about the inherent complexity in the framework.”
APRA is also consulting on a number of proposed changes to the application of accounting standards in funds’ financial reports.
The regulator stated that it does not expect any of the new rules to impose a significant burden on funds that already have sound strategic, business planning and expenditure processes in place, while noting others “may need to make more significant adjustments”.
The consultation period for this package closes on March 29, 2018, and APRA is proposing that final requirements will be released in mid-2018 and come into effect from January 1, 2019.
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.