A video of this speech is available on the AIST website.
Winning the numbers game
Good morning, and thank you for inviting me to address you once again.
This is my 21st major speech as the APRA Member with primary responsibility for overseeing superannuation, and will probably be my last. A few weeks ago, we announced that our new APRA Member Margaret Cole will assume this role from the first of July, while I will assume primary responsibility for overseeing insurance.
By the time I pass the baton to Margaret, I will have spent eight years overseeing APRA’s supervision of the superannuation sector. It’s been a period of tremendous change and evolution. On the very day I commenced this role – 1 July 2013 – the new prudential standards for superannuation that were implemented as part of the Stronger Super reforms took effect, and the MySuper regime was being implemented.
Eighteen consultations, 77 letters to industry, 11 new or updated prudential standards1 and three heatmaps later, the APRA-regulated superannuation sector has significantly changed. It has expanded to manage an asset pool around one and a half times Australia’s GDP and average member balances have more than doubled. Governance practices have lifted significantly through greater board diversity, including more independent directors. Risk identification and management have strengthened and broadened into new areas, such as cyber, and environmental, social and corporate governance considerations. And I’m sure that long-time industry observers would agree that, overall, it’s a far more mature and professional industry than it once was.
Fundamentally, however, superannuation is still a numbers game, where the ultimate determinant of success is measured by the monetary benefits delivered to members in retirement. While that, too, has been a broadly positive story, some of the numbers we are seeing still work against the best interests of members: too many funds overall, too many underperforming funds, fees that need to come down further, and a number of funds that probably lack the scale needed to deliver optimum member outcomes over the medium- to long-term.
With superannuation becoming larger and ever-more integral to both members and the broader economy, the fiduciary role of trustees is likewise growing in importance. In line with the more significant financial institutions they are now governing, trustees need to continue to raise their standards and improve the outcomes they deliver for their members. And just as trustees face greater expectations, so too does APRA. So even though next year Margaret will be standing here rather than me, our focus won’t change: you can count on APRA continuing to drive improvements designed to ensure you are providing quality, value-for-money outcomes for members.
The changing face of super
Not everything has changed, let alone changed for the better, over the past eight years: for example, there are still some current directors who were in the same role when I was engaging with the industry as a consultant over 20 years ago!
Overall, however, the numbers tell a clear story of an industry that has grown enormously in size, complexity, influence and impact. Individual account balances have grown from an average of under $36,000 in 2013 to about $87,000 today. In 2013, on average, a trustee was responsible for a fund of less than $5 billion and now the average trustee oversees a fund more than twice that size, at over $11 billion. Assets under management by APRA-regulated funds have roughly doubled to nearly $2.1 trillion today; that’s compound annual growth of 16 per cent a year.
Another significant change has been the introduction of MySuper products just over seven years ago. We now have 60 per cent of accounts in MySuper products, and MySuper assets now exceed $800 billion and account for almost 40 per cent of APRA-regulated super assets.
Industry consolidation has also been an ongoing trend. The landscape of 2013 comprised 279 APRA-regulated superannuation funds; it has since been whittled down by more than 100 to 170, and will continue to fall further as the numerous potential merger discussions currently underway take effect.
Government initiatives to consolidate unintended multiple accounts – which have seen the overall number of accounts fall by around a quarter since 2013 – have also helped to push up individual account balances. The number of member accounts in APRA-regulated funds has fallen from over 28.8 million in 2013 to just under 22.5 million in 2020 – a welcome reduction but there is clearly further to go.
APRA’s work to continually lift the bar for the super industry has also unquestionably played an important role in lifting standards, enforcing accountability on underperformers, and ensuring member outcomes are at the centre of trustee decision-making.
Raising the stakes
Despite the generally positive trajectory, there can be no let-up in regulatory scrutiny of superannuation trustee performance. The industry’s increasing size and complexity, its wider economic impact and influence, and – most significantly – its fundamental importance to the quality of retirement living for Australians, means there is simply too much at stake. It is therefore even more important that regulators continue to ensure the multi-trillion-dollar pool of superannuation money is being invested appropriately, in ways that advance the best interests of members, and hold trustees to account to ensure they are doing so.
Hence the increased scrutiny APRA has been applying to trustee expenditure by enhancing Prudential Standard SPS 515 Strategic Planning and Member Outcomes, and requiring more granular expense data as part of the Superannuation Data Transformation program. At the sharp end of this work is the current thematic review focused on trustee promotional expenditure. The review’s objective is to better understand how trustees demonstrate the value that is being delivered to members when they decide to make these expenditures, and the metrics that trustees use to measure success. We have asked more than 20 trustees and industry associations to provide information and supporting analysis on different types of expenditure, including advertising campaigns, television program sponsorship, sponsorships of sporting teams and payments to external organisations. We expect to conclude this thematic work in the next few months and, if we form the view that some expenditure is contrary to the best interests of members or the sole purpose test, enforcement action will follow.
APRA will also seek to strengthen investment decision-making and governance practices, commensurate with a more mature industry with a much larger asset base to manage. In the middle of the year, we will release a consultation package including an updated Prudential Standard SPS 530 Investment Governance and associated prudential guidance. The updated material incorporates learnings from our supervisory experiences through the pandemic, our unlisted assets thematic review, as well as the recommendations of our post-implementation review of the prudential framework. In particular, the package seeks to clarify our expectations and strengthen requirements around asset valuation practices, liquidity management practices, investment stress-testing, and the consideration of agency risks in internal investment management arrangements.
And of course, at the heart of good governance is a board of directors that collectively have the diverse skills, experience and perspectives needed to oversee their business. Having long-standing, experienced directors is valuable, but boards must also evolve and refresh to ensure that they can effectively govern the larger, more complex superannuation funds of today and into the future, not the fund they were a decade ago.
Not every number in superannuation should be going up – fees are a clear example.
Since launching our MySuper Product heatmap in November 2019, total fees in the sector have fallen by over $408 million. We want to see that continue. Some 35 per cent of member accounts, however, are in the choice sector, and that’s where our attention is now turning.
As previously flagged, APRA is developing a choice product heatmap, which we intend to publish towards the end of the year. This should help prepare industry for the Government’s proposed performance test for trustee directed products by providing relative performance information for a similar segment of choice products. We will also incorporate insights from the choice heatmap into our supervisory approach, intensifying scrutiny on the poorest performers and taking action where necessary.
As part of the choice heatmap development process, we have been analysing the performance of multi-sector choice products and intend to publish our findings in coming months. One observation I will foreshadow, and which is not new by any means, is that administration fees in the choice sector are notably higher than they are for comparable MySuper products. There is also a wider range of investment performance outcomes in these choice products compared to MySuper products, particularly at the poorer-performing end of the spectrum.
Trustees should already be scrutinising the outcomes they are delivering for their choice members through the annual outcomes assessments and business performance review. The choice heatmap is set to highlight in bright red precisely which multi-sector products are charging the highest fees or have the poorest investment performance. So, all trustees would be wise to be taking a close look now at the outcomes they are delivering for their choice members and taking proactive steps to fix any identified weaknesses.
Another area where we would like to see numbers ticking down is the number of funds, products and investment options.
APRA has been pushing hard for several years for more fund mergers. This isn’t simply about weeding out persistent underperformers, or making the sector easier to navigate for members – although both are important. It’s also about scale. All things being equal, the evidence suggests that larger funds are better placed to deliver stronger investment performance and lower fees. As the operational capability needed to run a successful superannuation fund generally increases with technological and regulatory developments, scale is becoming a more important determinant of member outcomes.
Over the past eight years, about 70 APRA-regulated funds have finalised mergers, and there are currently around a dozen potential mergers under consideration that we know of. While this is welcome, we’re not convinced all of these mergers are producing a new entity that has either the governance capability or the scale to be sustainable over the long-term.
The emerging industry view seems to be that any fund with less than around $30 billion in assets under management is increasingly going to be uncompetitive against the so-called “mega-funds”. While there will inevitably be debate about the threshold level of assets needed, we agree with the sentiment. Smaller, underperforming funds would ideally consider merging with a larger, better performing partner rather than another small fund – especially one that is also underperforming. APRA doesn’t intend to let perfection be the enemy of the good. But we expect trustees to consider whether a small fund to small fund (or bus-stop) merger is going to tackle underlying issues or just be a temporary stop on the way to the ultimate destination of sustainability.
With an obligation to consider members’ best interests, not just better their interests, trustees should be considering the express bus route, that will take them more directly to where they need to be.
One type of exit we don’t want to see is a superannuation trustee forced out through insolvency or other financial difficulties.
Later this year, APRA will release a new cross-industry prudential framework for recovery, resolution and exit planning. The framework is designed to enhance the readiness of all APRA-regulated entities to deal with financial stress, and will place much of the obligations on entities themselves to take control of their own destinies.
The pandemic, which presented liquidity and operational challenges for trustees, has been a sharp reminder that financial entities – and regulators – must be prepared for shocks from unexpected directions. Although severe financial stress is a low probability for trustees, it is a foreseeable challenge, and one that is first and foremost their responsibility to prepare for. It is particularly acute for trustees without material financial resources of their own.
The proposed framework underscores that trustees should have a plan in place to ensure their obligations to members can continue to be met – whether that plan is to ‘recover’ themselves to financial soundness or to exit the industry in an orderly fashion. In parallel, APRA needs to be ready with its own plan for when entity planning is not sufficient, where we will step in and take control.
Getting to the heart of it
The commentary on and within the industry can sometimes present the impression that superannuation is beset with underperformance, exorbitant fees and conflicts of interest. In fact, Australians are generally well served by their superannuation funds and overall member outcomes continue to improve.
But as the superannuation industry continues to grow and evolve, trustees that fail to meet rising public, Government and regulatory expectations will eventually find their days are numbered. Meeting those rising standards hinges on something that can’t be calculated or presented in a spreadsheet: a mindset where members’ best interests always lie at the heart of trustee decision-making. For all the industry’s progress over the past eight years, I don’t think we’re completely there yet. We hear a lot of trustees talk about putting members’ interests first but the evidence to support that is often not as easy to point to as it should be.
And yet I’m optimistic. Many trustees absolutely get the need to change, and continually seek to improve member outcomes. As I’ve said in previous speeches, even for the best performing funds, standing still is not an option when you are looking after someone else’s money.
The superannuation industry has also proven it can do extraordinary things at short notice under highly challenging circumstances. On that basis alone, I am confident in the industry’s ability to make the positive changes we, and their members, expect to see.
One thing that won’t change is APRA’s commitment to improving outcomes for superannuation members. And with a range of legislative and regulatory reforms on the horizon to further lift industry transparency and accountability, trustees have no choice but make sure that they can clearly demonstrate – with robust evidence – how they have put their members’ interests at the very heart of every decision they take.
1 Figures include cross-industry initiatives incorporating superannuation