I am pleased to be addressing AIST’s CMSF alongside colleagues from the Australian Securities and Investments Commission and the Australian Tax Office. APRA has recently released its corporate plan, which continues to focus on two key themes: “protected today” and “prepared for tomorrow”. These themes are just as relevant to this industry given the environment of ongoing uncertainty and ambiguity in which we operate.
We have been asked to talk about what the next five years will bring in the ecosystem of regulation of superannuation funds. Well, there’s an old Danish proverb which says “making predictions is hard, especially about the future”, and if – as another saying goes – “a week is a long time in politics”, five years is an epoch.
But I can confidently make some near-term predictions in a few topical areas, and I might even get my crystal ball out and make a few remarks on the longer-term landscape – a topic I am regularly asked about and there is always much commentary (or perhaps I should say controversy) on.
The MySuper Performance Test
It’s just over a week since APRA published the results of the 2022 MySuper performance test. On the whole, the results were a positive reflection of where the industry is at and its progress since last year. Despite a challenging 12 months in the global investment environment, including both war and pestilence, this year five of the 69 products tested failed, down from 13 the previous year.
And what can I say about the future of Performance Tests? A review of the Performance Test regime is now underway with the Government today launching a consultation on the Your Future, Your Super laws. We always want to get smarter and better and the consultation process will give industry the opportunity to have a say as to what a future evolution of the Your Future Your Super reforms could include. So from an APRA perspective a review after two cycles of the test makes good sense.
But the Assistant Treasurer has also been very clear that funds must always be held accountable for their performance, so we expect performance testing, in some shape or form, is here to stay. And for our part, we have seen the benefits that greater transparency on performance brings, so regardless of the exact form of the statutory test, the spotlight will only get more intense.
What else is here to stay?
We will continue our relentless focus on driving quality outcomes for members using our influence, levers and powers. Trustees must focus on the needs of the members – seeing things through their eyes – the owners of the money. This aligns with our strategic focus areas of rectifying substandard industry practices and ensuring trustees are working to eradicate persistent underperformance.
To support this, we will be publishing our Heatmap on both MySuper and choice products again later this year. We will continue to push into areas like governance, business planning, investment governance and, importantly, the frameworks and decision-making associated with expenditure. We have feedback from some trustees that forcing the focus on how members’ money is spent has made them think very hard about whether it should be spent in a particular way. This has resulted in decisions not to spend and it is this level of focus that we expect to see from all trustees.
Critical to all of this is the need for trustee boards to have the skills, experience and capabilities to oversee strategy and risk, not just for today, but also to shape member outcomes for tomorrow. APRA has been pushing into the topic of board renewal, skills and capability and size and effectiveness of boards, and we will continue to focus on this as part of our ongoing supervisory work.
What things might change?
The prudential framework will always need to evolve as emerging risks and issues develop. But although as a prudential regulator our focus is on managing risk and heading bad things off before they happen, there is permission and encouragement for entities across our regulated industries to be creative and innovative.
The retirement income covenant represents an area where APRA welcomes superannuation funds bringing creative thinking to the challenge of delivering more and better retirement income solutions. It has been encouraging to be part of recent discussions with both trustees and wider industry thinkers on this topic and we welcome the progress that trustees are making to push into this adaptive challenge of retirement for Australians.
It is definitely a big issue for the next five years and beyond and one that will require a whole of industry approach to evolve. Not only are there opportunities here to drive better retirement outcomes for members, there is the potential to create a point of difference that delivers a competitive edge to your fund – and one that isn’t simply based on scale. It is about helping your members transition with confidence to the phase beyond accumulation.
Moving to another very topical area, the results of our climate risk self-assessment, published a month ago, presented a positive picture of the superannuation industry’s willingness to engage on this essential and evolving issue. Across every category – governance and strategy, risk management, metrics, and targets and disclosure – superannuation funds reported being more advanced than either banks or insurers. While it is pleasing the industry thinks it is well-prepared, we expect to see this translate into insights that lead to better outcomes for members.
Another important issue for the relative near-term horizon for both APRA and ASIC is operationalising the Financial Accountability Regime. We have been working on this together for some time as we, along with industry, await the passage of legislation by the Parliament.
Data and Modernisation
Internally at APRA we also embrace innovation and have been running hard in two key areas.
First on data. With our new APRA Connect data collection tool now live, we are collecting more data, more efficiently, with the intention ultimately of reducing the burden on industry. We will show the first public evidence of the benefits of this within weeks as we publish our new Quarterly Superannuation Industry Publications. While there is some overlap with our existing quarterly statistics, the new publications will deliver insights not previously available. These include more granular information on fees and costs, asset allocation and performance data, as well as information on insurance arrangements, expenses and member demographics.
Next is our agenda to modernise the prudential architecture and our regulatory frameworks. This is a key component of our strategy to enhance our core operations by ensuring that the prudential rules, standards and practice guides are easier to understand and manage, that they enable new regulatory technologies, and are adaptable to innovation in the digital economy. This initiative was outlined in our 2022 Supervision Priorities and we will be issuing an information paper on our ideas and approach for industry feedback shortly.
The superannuation industry is already starting to see what this might mean through the launch of two recent consultations: our first cross-industry standard on operational resilience will simplify the prudential framework by replacing five existing standards with a single cross industry approach; and SPS 515 Strategic Planning and Member Outcomes is currently under review with us having released a discussion paper for industry input. We are also trialling a new way of presenting our prudential standards and practice guides. Our two cross industry prudential practice guides on crisis preparedness released for consultation yesterday have a new look, combining excerpts from the accompanying prudential standards.
In all of this, we aim to elevate our approach both to supervising the industry and simplifying the frameworks within which regulated entities operate.
Industry of the Future
So let me come back to a few words on the superannuation industry of the future. I am not going to give any predictions, forecasts or even an estimate of what it might look like. APRA has not in fact ever said what number of super funds there will be in five years or any other time period, nor have we said that those under a certain size of funds under management will not survive. We do say, however, that there is clear evidence from our own research to show that funds under a certain size are more likely to face sustainability challenges unless they have some other sort of competitive advantage.
What we also say, and will continue saying, is that members have the right to have their savings in well-governed and high performing super funds. It’s a competitive market out there. Performance tests and stapling are driving change. What will determine which funds remain competitive and sustainable and which become footnotes in financial history will depend on trustees being able to identify opportunities for growth and innovation. It will depend on trustees prioritising the interests of their members with clear propositions and points of differentiation, as well as a member-centric service approach.
Five years ago, there were 200 APRA-regulated funds1 with assets of $1.6 trillion. At the end of last year there were 141 funds with assets of $2.2 trillion. If we were designing the super fund industry right now it wouldn’t look like it does today with 141 APRA-regulated funds, of which 110 collectively manage 10 per cent of assets. Nor do we want to replicate the banking sector but we are very far from that. I urge you to have a good look at our technical paper on sustainability published in March. The future shape of the superannuation industry in Australia actually depends on you.
With so much at stake for Australian retirees and the prosperity of the country, myths are unhelpful. I hope I am busting a few of those today.
1 Figure only covers funds with more than four members.