A reluctance or lack of appetite by the Australian Prudential Regulatory Authority for enforcement against underperforming superannuation funds has likely played a role in the creation of the Your Future, Your Super performance test, a Senate Committee has heard.

“That’s why this Bill is taken before parliament, because there’s a combination of lack of clear power and lack of willingness to do the job,” Liberal Party Senator Andrew Bragg (main picture, left) said, referring to APRA’s oversight during an exchange with director of the Centre for Law, Markets and Regulation at UNSW Law, Scott Donald (main picture, foreground), at an Economics Legislation Committee on Wednesday.

Donald acknowledged that a more direct approach by APRA could in theory be more effective than the so called “bright lines” performance test which has been proposed by lawmakers.

“I do have to wonder why a more direct approach attacking those and addressing them by APRA… might be more effective at getting rid of those systemic or endemic reasons why there is underperformance,” Donald said in response to a question from Bragg asking why there are still many underperforming funds.

“There are undoubtedly funds that have underperformed over an extended period…. In many cases that underperformance is not because of a lack of skill or appetite or a lack of ambition, it may have to do with other structural issues or those sorts of things,” Donald said characterising the apparent underperformance of some funds.

A recent Investment Magazine analysis showed at least 25 funds are underperforming the SAA listed performance benchmark by more than 50 basis points over five years based on June 2019 disclosures, the closest publicly available data to the government’s proposed eight-year listed performance benchmark.

“My judgement is APRA has a wide range of powers and would have the legal powers to do what we’re asking,” Donald said, referring to APRA’s scope to address underperformance.

Indeed, APRA has the right to give the direction and order mergers and direct trustees to relinquish control over a license in certain circumstances under section 131E of the Superannuation Industry (Supervision), Togthr and Equip Super chair Andrew Fairley noted in a recent interview.

Persistent underperformance

During her opening remarks at the Senate Committee APRA deputy commissioner Helen Rowell said the Prudential Regulator had made “substantial progress over many years in lifting industry standards, boosting transparency and weeding out persistent underperformers, including through our MySuper Product Heatmap, which resulted in significantly reduced fees and costs in its first year.”

Rowell also acknowledged during the opening address, however, that instances of persistent underperformance remain and there is still much more to be done.

Back in late January Rowell said during an interview at Investment Magazine’s Chair Forum that the biggest challenges tackling underperformance and lifting member outcomes had been the so called “argie-bargie” the Prudential Regulator had with the industry about what is performance and what is not.

In recent weeks APRA made Margaret Cole, a global regulatory policy expert and former senior executive at the British Financial Services Authority responsible for regulation and supervision of superannuation. Rowell has been given responsibility for general, life and private health insurance starting in July.

Bragg, who was acting chair of Wednesday’s committee, continued to press witnesses on APRA’s lack of enforcement action against the superannuation industry, a topic that was also a feature of the Hayne royal commission hearings. Bragg was joined on the committee panel by Australian Labor Party Senator Tony Sheldon (main picture, right) in Sydney.

During his allotted question and answer slot on Wednesday ASFA chief executive Martin Fahy somewhat cryptically noted the superannuation industry’s unique structure could have contributed to its regulation challenges.

“The promise of superannuation is actually a weak promise in that it doesn’t necessarily need to be underpinned by capital. So on a regulation level the strength of the promise needs to be matched to the strength of the regulation. That premise of regulation theory has been eroded very very strongly.

“There is no fundamental underlying promise in superannuation other than [for] trustees to act in their members’ best interests,” Fahy said.

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