Superannuation fund trustees will be forced to benchmark themselves annually and judge whether they provide value-for-money to their MySuper and choice members, as part of the prudential regulator’s further crackdown on underperforming funds.
The Australian Prudential Regulation Authority issued a new framework on Wednesday, including one new prudential standard and two new prudential practice guides, for the $1.8 trillion registrable superannuation entity (RSE) sector that it oversees.
“These changes to the prudential framework set a higher bar for RSE licensees by requiring a robust assessment of the outcomes delivered for members, to be reflected in strategic and business planning,” APRA deputy chairman Helen Rowell said.
The new measures will commence from January 1, 2020, and will force RSE licensees to benchmark and evaluate their own performance each year, taking into account “a broad range of factors”, including investments and insurance covering members of both MySuper and choice products.
“APRA expects that many RSE licensees will focus on net investment returns in assessing the delivery of outcomes, particularly for default (MySuper) members; however, a focus on net investment returns to the exclusion of other considerations would not be sufficient, as it would not capture other key factors that impact member outcomes,” the regulator stated. “APRA is also concerned that a focus solely on net investment returns may have inadvertent consequences; for instance, incentivising an RSE licensee to reduce costs in key risk and governance areas in an unsustainable manner in order to improve net investment returns.”
Maintain a business plan
In addition to requiring an outcomes assessment, APRA also added more stringent requirements for strategic and business planning, including how funds manage and oversee fund expenditure and reserves.
Under the new rules, an RSE licensee must maintain a “rolling plan of at least three years” for its business operations and review it each year. The board must approve this plan.
“APRA expects RSE licensees will have in place a comprehensive approach to monitoring and assessing performance of the entire business plan,” the regulator stated in a document titled Response to Submissions: Strengthening Superannuation Member outcomes.
APRA launched a draft consultation package proposing an array of revisions to its standards in December last year and had been consulting with the industry since August 2017. At the time of the launch, Eva Scheerlinck, chief executive of the Australian Institute of Superannuation Trustees, said: “For any outcomes test to be meaningful, it must apply to every superannuation option and have long-term net returns as the number one priority.”
In the draft, APRA also proposed widening a current prudential standard to require super funds to make it easier for members to opt out of life insurance. The regulator stated it had now decided to defer changes to this standard until the federal government’s Protecting Your Super Package bill, still in the Senate, was passed or not passed.
The 2020 start date would provide the industry with “sufficient time to meet the new requirements”, the regulator stated. “RSE licensees will need to prepare well in advance, in order to meet the new requirements from the start of 2020.”
There is legislation before Parliament that would, if passed, introduce a legislated outcomes assessment.
“APRA’s requirements are consistent with the outcomes assessment proposed in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Bill 2017,” the regulator stated. “APRA will review whether any changes are needed to the prudential standards and guidance to maintain consistency with the bill, if and when it is passed.”