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APRA Deputy Chair Helen Rowell - Speech to AIST Online Chairs Forum

Continuing the drive towards a better super system

Good afternoon. It’s good to be with you again, albeit virtually, as is the way these days.

In preparation for today’s event, I went back and looked at my comments to you at last year’s Chair’s Forum, where I spoke about embracing change and the opportunities for improvement it can bring. I didn’t envisage the extent of the changes to superannuation that were just around the corner, nor did I foresee a global pandemic forcing most organisations to invoke their BCP plans and run their operations from home!

The pandemic and the associated expansion of early access arrangements presented major operational and financial challenges that I am pleased to say the super industry has managed well through this health and economic crisis. But it is equally important to reflect on those areas where boards need to continue to focus to ensure they are operating at their best.

Twelve months ago, I outlined APRA’s agenda and this has not really changed – improving member outcomes through enhanced data, greater transparency, a stronger prudential framework, more intense supervision and a lower threshold for taking formal enforcement action. Last week’s Federal Budget foreshadowed major changes that are very much aligned with this agenda and are likely to have a substantial impact on the industry. If passed by the parliament, the “Your Future, Your Super” package will shine a brighter light on fund performance and trustees’ expenditure decisions, and help members make better informed decisions about who is looking after their retirement savings. The package responds to key recommendations of both the Productivity and Royal Commission reports that have also informed APRA’s agenda.

Although the measures are new, the direction they take the industry is not. APRA has been driving down this road for a number of years toward our goal of improving outcomes for superannuation members. And while the latest proposed changes are likely to make life uncomfortable for the trustees of a subset of persistently underperforming funds, as Chairs, you should never forget that it is you – not APRA or the Government – that is in the driving seat when it comes to your fund’s future.

Accelerating progress

From APRA’s perspective, the Government’s proposals are very much aligned with APRA’s ongoing work to ensure that members and member outcomes are at the forefront of all decisions that trustees are making. The release of the MySuper Product Heatmap last year was a game changer for transparency across the industry, and has already improved outcomes for a significant number of members. As outlined in our June update of the heatmap, more than 40 per cent of MySuper members have seen a reduction in fees since its initial publication last December and further fee reductions have occurred or are planned since then. The flip side, however, is that inaction, or inadequate action, by some funds has meant that too many members still remain in funds where fees are too high and returns are too low - and that is not good enough by anyone’s standards. 

In the near term, APRA will be working closely with the Government, ATO and ASIC on the detailed implementation plan for these measures. We will also be considering the changes that may be needed to our priorities and work plan, including potential changes to the MySuper Heatmap publication currently planned for December 2020. Critical to the implementation of the proposed reforms will be the expanded data collection under the Super Data Transformation program on which we are consulting with industry, and which is proposed to be effective from 1 July 2021 with reporting due in September next year. 

Board governance

As you all know, the super system now manages almost $3 trillion in retirement savings on behalf of 16 million Australians; and, largely due to its compulsory nature, it is expected to reach $5 trillion by 2034.

These are big numbers, and as chairs of superannuation boards you are in a privileged position. When it comes to making key decisions that will impact member outcomes, including in areas such as asset allocation, risk management, marketing campaigns or appointing new directors, it is boards – and in particular their chairs – that have their hands on the steering wheel; and with that comes tremendous responsibility.

Yet, we continue to see board governance that significantly lags better practice. By no means is this reflective of the industry at large, but equally, these challenges are not unique to only the smaller funds in the industry or underperformers. We are pushing harder into these issues, so that all boards lift their governance practices and break the nexus with the past where needed. It is not acceptable, in our view, for boards to adopt approaches that appear to flout the spirit and intent of APRA’s prudential standards and prudential guidelines in key areas. 

We have three core areas of focus, which are not new and so should not be a surprise:

1. Board skills, composition succession planning and director tenure

It is critical that boards undertake proactive succession planning to ensure maintenance of an optimal mix of skills and experience, and so that there is an orderly renewal and refresh of directors over time. This requires regular critical evaluation of whether the board composition remains optimal from a capacity lens to enable it to fulfil its obligations.

Too often we are seeing boards invoke “special circumstances” provisions to extend director tenure beyond maximum term for reasons that appear to reflect poor succession planning and management rather than genuine special circumstances. No individual is irreplaceable. Boards need to have a strong skills matrix in place and robust succession planning. APRA will continue to push all boards to ensure that use of special circumstances becomes a rare exception rather than the norm. 

2. Strategic planning and contingency planning

A best practice board is needed to drive delivery of better outcomes for superannuation members. That means a board that is diverse, has capacity to do the work that is needed, is strategic and focusing on the future. Importantly, it is also a board that knows when to call time! 

The requirements in SPS 515 seek to ensure that boards are focused on the strategic direction of their fund and looking beyond the here and now. However, the reality is that some boards remain immature at strategic and business planning processes, and appear not to realise that doing nothing is going backwards and taking their members with them.

If these boards are failing to ask themselves the question “Would my members be better served in another fund?” we certainly will be, and will also be requiring action to move toward the exit lane. These funds will likely fail the annual outcomes assessment, however trustees that are genuinely focused on improving outcomes for their members would be acting well before that happens.

3. Merger scenarios and go forward boards

The final governance area I want to touch on is merger scenarios and decisions about the go forward board. Mergers are not about maintaining jobs for current directors or deals such as “you take the Chair” and “I’ll take the Deputy”. These decisions need to be based on the skills and experience needed to sustainably deliver good member outcomes for the merged entity.

With the ongoing fund consolidation occurring across the industry, we will continue to challenge and demand better practice on all dimensions of the deal – the business case, the board composition and governance arrangements and the benefits that need to be realised for members. Self-interest has no place in the board room, and this will continue to be a focus of APRA’s work to lift governance practices across the industry.

Strap yourself in

With the superannuation industry in the midst of managing its response to the greatest economic challenge in nearly a century, I recognise that the prospect of more substantial change may be daunting for many chairs. But as I stated at another AIST event less than two weeks ago, change in superannuation is both inevitable and necessary to optimise outcomes for members. While the sudden acceleration might be a surprise to some, the direction we are heading should not be; the industry has been on notice for years that chronic underperformers need to improve or hand the keys over to someone who can drive better outcomes for their members.

Boards are not powerless here; when it comes to your fund’s future you are in the driver’s seat. As chairs, you and your fellow directors are the first line of defence in protecting your members and promoting their interests, and it is your actions and decisions that determine whether your fund races ahead or gets hauled off the track. But you are not on your own. APRA’s prudential standards and guidance provide a roadmap for you to follow; and our supervisors are not just there to keep you in line but also there with guidance and support to help you do better for your members. So, in the words of Jim Morrison, “keep your eyes on the road and your hands upon the wheel.” It’s going to be an interesting ride, but your ultimate destination is up to you.

Your Future, Your Super

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.