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APRA Member Margaret Cole – Remarks to the Association of Superannuation Funds of Australia webinar

APRA’s Heatmaps and the YFYS performance test work hand in hand to drive change


Yesterday APRA released its 2021 superannuation heatmaps. It is the third year that we’ve released a MySuper heatmap, and for the first time we’ve also released a heatmap on choice products.

The heatmaps provide information on the returns, fees and costs, and sustainability of default investment options – the MySuper products – and now also information on the returns, fees and sustainability of multi-sector choice investment options. The information is clear and consistent. It enables comparison of MySuper products with each other, and comparison of multi-sector choice products with each other. The heatmaps make it easier for trustees and other stakeholders to explore and distinguish between the thousands of investment offerings provided by APRA-regulated super funds, and see who is, or isn’t, delivering good outcomes for members. 

We first started publishing our heatmaps in 2019 when trustees became subject to new legislative obligations to assess the outcomes they are delivering to members. APRA wanted to provide a resource that trustees could use as a starting point to make those assessments and to act to address identified weaknesses. The heatmaps have also provided an important tool for APRA supervisors to enable them to focus their energies and inquiries to the areas of greatest need. After publishing the first heatmap results, we escalated our supervision of those products that were showing largely as the colour crimson: the canary in the coal mine warning of poor outcomes for members. 

The philosophy underpinning all of this work is our belief that, in a notoriously opaque and complicated industry, transparency is a tool to deliver better outcomes for members. Since the publication of the first heatmap, 22 MySuper products, most of which were underperforming, have closed, merged or otherwise left the market. Millions of MySuper members have also benefitted from fee reductions – a trend that has continued since we published the first full refresh of the heatmap last year.

The implementation of the Government’s Your Future, Your Super (YFYS) reforms effective in July this year, including the performance test, has taken the use of transparency as a tool to a new level. The introduction of this simple “pass/fail” test (administered by APRA) established clear consequences for trustees of, not only a first, but also a second failure of the test. Thirteen MySuper products failed the performance test this year. These 13 products had already shown up on our heatmaps as underperforming. Their failure of the performance test has enabled APRA to engage even more actively with the trustees of these products to heighten the focus on member outcomes. Three of the 13 trustees have exited the market and transferred their members and assets to other funds. At least two more have announced their intent to do so, and APRA has imposed licence conditions on two others to require them to seek a new home for their members. As we have stated many times before, trustees of underperforming funds have no place to hide. APRA’s heatmaps and the performance test work hand in hand to drive change.

Achieving another level of change – improved member engagement – seems to be a harder nut to crack. Many members have clearly read the letter that arrived in September telling them that their MySuper product had failed the test. Some members have been galvanised and have moved to different funds with lower fees and better prospects of sustainable performance. I have heard from some trustee board members and senior executives how very difficult getting strong member engagement is, and I can recognise that. But super funds pay close attention to member engagement when it comes to attracting new members, so I feel sure all these highly intelligent driven people can find a way. If more members don’t engage and move for themselves this is where our active supervision and enforcement comes in – you’ve seen what we’ve done recently, and we are not backing down.

This year in the MySuper heatmap we’ve published the actual results of the Your Future, Your Super performance test for all MySuper products. Each year in August, we will publish who has passed and who has failed the MySuper and choice performance tests, and in December, our intention is to release the heatmaps with all of their rich data, including this metric. 

Our expansion of the heatmaps to choice options is an important next step to improving transparency and outcomes for members. There are over 9000 distinct choice options on offer in superannuation and this first Choice Heatmap has deliberately focused on a subset of these options (multi-sector investment options), which represent a significant proportion of both assets and member accounts in this sector. We intend to expand the coverage of the Choice Heatmap in coming years in line with the expansion of the super data collections we are receiving. 

For this first Choice Heatmap, we partnered with SuperRatings to provide the data given APRA’s own collection of choice investment option data is only just getting underway. No doubt some will quibble about what has been left out this time around, but I encourage you to put your focus on what we have been able to capture, which you will see has unearthed some interesting results. By looking at more than 700 multi-sector investment options, representing 40 per cent of total member benefits in the APRA-regulated choice sector, some areas of significant underperformance are clearly evident – and impacting a higher proportion of products than in MySuper. 

Because trustees offer a range of choice investment options, most trustees in the choice heatmap have more than one investment option included. One thing that has struck us is that there is a small handful of trustees where more than half, sometimes all, of the investment options that we’ve looked at show as deep red on the heatmap, indicating significantly poor investment performance. This is clearly unacceptable for members in those products, and raises an equally red flag for APRA about the capability of these trustees to meet their legal duty to safeguard members’ best financial interests.  

So what is APRA going to do about it? The real question is: “what are the trustees of superannuation funds going to do about it?”. Trustees have to assess the outcomes they are delivering to members in each of their investment options. The heatmap shows that many trustees will need to explain why their choice investment options underperform peers and benchmarks, why their fees are so much higher than others, and what changes they are going to make to fix this. Our analysis of the Choice Heatmap indicates there may be broad problems with investment governance that impact all investment options that are offered. So trustees will need to step up their governance processes and weed out underperforming offerings to ensure that the investments they offer are in the best financial interests of their members. 

Putting the onus on trustees to respond doesn’t mean APRA will be passive. To the contrary, you can expect a relentless focus on holding trustees to account for what they are delivering to members. Our active supervision of underperforming MySuper products over the past two years has driven substantial benefits to members in the shape of reduced fees and members moving or being moved into better performing funds. We expect the Choice Heatmap to drive similar benefits for members in that segment of the market, including the removal of weaker products, options and funds from the industry. 

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.