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APRA Chair Wayne Byres - Speech to the Gilbert + Tobin Conversation Boardroom event

Thursday 19 September 2019

Driving better member outcomes

Wayne Byres, Chairman - Gilbert + Tobin Conversation Boardroom event, Sydney.

My brief for today was to say a few words about ‘what’s on my mind’. To be honest, there’s a lot on APRA’s plate at present, so there are plenty of things that would fit the bill. In the interests of time, I thought I’d talk about one particular topic that’s on lots of people’s minds at present: member outcomes in superannuation. That is obviously of interest to those of you from the superannuation industry. But even if you’re not, I think it’s illustrative of how APRA’s approach is evolving more broadly.

It’s well known the superannuation industry is big – with assets of almost $3 trillion – and the funds flowing into it each year are sizeable – around $150 billion in annual contributions. The average size of an APRA regulated superannuation fund has quadrupled from $2½ billion to $10 billion over the past decade. For many people, their superannuation balance is, or will become, either their largest or second largest financial asset. So it’s undoubtedly a very important industry, both to the financial well being of individuals but also to the economic prosperity of Australia.

In the past year though, both the Productivity Commission and the Royal Commission have concluded the superannuation system is not delivering sufficiently well. Trustees have not always been focused on their members’ best interests, aggregate fees and costs are too high, insurance has not always been good value for money, and there has been too much inefficiency in the system. And they also said – very loudly and clearly – that regulators should do more to hold trustees to account to address those issues.

We agree. So what are we doing to respond? 

Broadly speaking, we have a three-pronged approach.

First is stronger standards, backed up by stronger enforcement powers.

A critical foundation for this was the passage earlier this year of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019. The Bill provided APRA with essential additions to our armoury: a broad and long sought-after directions power, a much needed power to take civil penalty action against trustees and their directors for breaching their obligations to members, including the duty to act in members’ best interests, and important controls over the transfers of ownership of trustee licences. As I’ve said in the past, the powers that the Bill delivered are a game changer for APRA, providing genuine regulatory muscle that has previously been lacking.

The new statutory powers are accompanied by a new prudential standard on member outcomes, which comes into effect from the beginning of next year. SPS 515 Strategic Planning and Member Outcomes, finalised a few weeks ago, requires trustees to perform an annual Business Performance Review to assess whether they are delivering sound, value-for-money outcomes for the members they are serving. Importantly, trustees must not just look backwards, but must also consider whether they will continue to deliver quality outcomes for all their members into the future. Where areas needing improvement are identified, trustees must do something about it.

Together, the legislation and standards provide a strong platform for APRA to drive a much more intense focus on member outcomes. It will inevitably produce some difficult discussions with trustees who are not delivering for their members – put very bluntly, are you going to get better or get out? – but all have had fair warning given the increased attention on this issue in recent years. 

This is not, I hasten to add, an entirely new approach. You only have to look at the shape of the superannuation industry over the past decade: the persistent ratcheting up of standards has driven the number of trustees to decline considerably. A decade ago, there were 278 trustees; today, that has contracted to 114. So it is not as though there hasn’t been any pressure driving the exit of trustees and funds that can no longer meet required standards. My point today is simply that that pressure will only increase from hereon.
The second leg of our approach is data.
Data is critical to understanding the performance of superannuation products, and the industry in aggregate. Unfortunately, our data collections in superannuation are not what they need to be. As part of the Stronger Super reforms in 2013, we substantially upgraded the superannuation data collection from what it was – the number of data items and options collected increased ten-fold at that time – but it was primarily focussed on data needed to support assessment of the new MySuper products. To reduce burden and promote efficiency, we aligned reporting obligations to accounting standard requirements and proposed product dashboard definitions for data on expenses, investment performance, fees and costs. 
Unfortunately, the comparability and consistency of that information has proven inadequate. And the ongoing delay in implementation of choice product dashboards has also delayed APRA’s collection of more granular information on investment performance, fees and costs for choice products. We will be therefore shortly kicking off consultation on a major overhaul of the superannuation data reporting regime. This overhaul aims to provide greater coverage, more granularity, enhanced consistency and better quality data. Our MySuper data collection is now in pretty good shape, so most of our focus will be on the choice segment of the market, where the largest data gaps remain.

This is a big task. There are well over 40,000 superannuation options out there. Choice, and the complexity that comes with it, creates a major challenge. We will inevitably need to be more prescriptive in what we ask for, and potentially diverge from other reporting requirements in some areas. But being able to genuinely assess member outcomes requires product level data at a sufficient level of granularity. When it comes to more data, there is – if you’ll excuse the pun – no choice.

Inevitably, an overhaul of data collections of this order of magnitude will lead to cries of complaint from the industry. New data collections, and even changes to existing collections, come at a cost. We understand that. We also know that costs are, ultimately, borne by members. But the current data collection has been deemed insufficient, so the status quo is not an option. Moreover, if in this day and age a trustee cannot reliably, accurately and quickly provide information on assets, returns, fees and costs for all their products across a range of dimensions, and including in relation to key service providers, one wonders how they will meet heightened standards for assessing the outcomes being delivered for their members.

The third leg of our approach is transparency.

As my colleague Helen Rowell has noted, we don’t just intend to collect data to hoard for ourselves. We intend to make as much of it as possible publicly available.

There will be stakeholders in the industry who will love getting access to this data. They will relish the opportunity to cut and dice it, and to analyse it in a multitude of ways. Inevitably, if experience is any guide, that will also lead to claim and counter-claim. As they say, there are lies, damn lies, and statistics!

Just providing more detailed data – particularly across the vast array of trustees and products that I mentioned earlier – is unlikely by itself to aid understanding of industry and product performance. Indeed, it may well confuse things more. APRA therefore has a role to play in using transparency to help put the spotlight onto the issues we think are important.

So later this year, starting with MySuper products, we plan to publish a selected set of performance-related measures and benchmarks. Our initial focus will be investment returns, fees and charges, and measures of sustainability/viability. We will subsequently expand that to include insurance costs. We have in mind a simple heat map or traffic light approach giving a snapshot of the performance of each MySuper product against a range of benchmarks. This approach will be expanded to include choice products over time as better, and more reliable, data becomes available. 

Our goal here is pretty simple: to identify those trustees that, when looked at across a range of dimensions, do not seem to be delivering value-for-money outcomes. It will add to the pressure on trustees to address persistent underperformance, or reconsider their continued presence in the industry. We have already undertaken one round of this work where, based on the data available to us, we identified a number of funds that seemed to potentially be generating poor outcomes. Given the limitations of the exercise, we didn’t publish the data, but did share it with the trustees concerned. It resulted in reduced costs for a number of funds or, in about half the cases, those funds being wound up.

If I thought that new data collections would generate cries of protest, they may well be muted relative to the likely reaction to the publication of the heatmap. No doubt there will be fierce complaints – particularly from those at the wrong end of the scale – that the data is wrong, the metrics we use are wrong, or that the benchmarks we choose are wrong. No doubt some people will claim all three!

Our view is: let’s have the debate. We do not intend to issue pass/fail marks to trustees. Nor will their status hinge on a particular metric beating a particular benchmark. Rather, we will be looking to highlight those funds who seem to persistently, across a range of metrics, produce poor returns and who, looked at in various ways, appear to have high costs. It is important to stress we are looking at the issue of member outcomes holistically. Debate about the merits of a particular data point or metric are therefore far less important when we are looking at the broader picture. A single measure is inevitably going to be imperfect. Consistently poor outcomes across a range of measures will be more difficult to defend.

So to sum up the story for superannuation, we now have a much stronger set of standards and powers, through which we will be intensifying the spotlight on member outcomes. We will overhaul substantially the data we collect to ensure we can do this across the full gamut of superannuation products and options. But we will not be waiting to complete the data overhaul before we bring greater transparency into play. We will start shortly with MySuper where –because members are by nature most likely not to be engaged with their superannuation – the need to protect their interests is greatest. 

Before I wrap up, I just wanted to return to my earlier comment about superannuation as something of a case study for how APRA’s regulatory and supervisory approach is evolving.

When it comes to powers and standards, it is clear that the Government is actively equipping regulators with better powers and more resources. The new powers in superannuation are merely one example of a strengthening of regulatory powers and sanctions that is occurring across the board. For APRA’s part, we have an active program of policy reform ahead of us to upgrade our standards in a range of areas. The bar is not only getting higher in superannuation. 

And we have set out a new, more proactive enforcement approach to take advantage of those powers and tools when we find regulated institutions are not complying or cooperating.  APRA is, first and foremost, a safety regulator rather than an enforcement agency – our primary task is to protect the community by trying to head off problems rather than clean up after them. But our Enforcement Review identified that we can selectively use our enforcement tools more strategically to deliver better community outcomes. We’re doing that already.

When it comes to data, we will be collecting more. That will not just be traditional financial data; we will also need to look at how we collect information more systematically on, for example, remuneration outcomes, cyber incidents or whistleblower complaints. Given that our most recent stakeholder survey revealed that a fair chunk of the sector thought we already collected too much data, and almost no one thought we collected too little, an expanded set of data collections will not be welcomed. But it is necessary if we are to get across the range of issues we now have to grapple with, and take advantage of modern technology to better target our scarce supervisory resources on areas of greatest risk.

Finally, transparency will be a tool that we can use to bring a sharper focus to problems and issues that need to be addressed. The Wallis Inquiry’s philosophy of disclosure and market discipline as a primary regulating force has been somewhat discredited, as the ability of consumers to understand and respond to disclosures has not been as strong as originally hoped. But that doesn’t mean there aren’t other ways that disclosure and transparency can be used to engage interest and promote debate amongst other relevant stakeholders. We will be actively looking at ways in which we can use enhanced transparency and communications to help drive good prudential outcomes.
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.