Helen Rowell, Deputy Chairman - Superannuation Committee of the Law Council of Australia
Good morning everyone, and thank you to the Superannuation Committee of the Law Council of Australia for the invitation to speak to you all today.
With the Royal Commission underway and the Productivity Commission in the process of finalising its review into the competitiveness and efficiency of superannuation, the sector is currently under significant scrutiny. Indeed, there is intense focus on the financial services sector more broadly as a result of a number of missteps that have undermined the reputation of, and community trust in, many of its participants. While to date the superannuation sector has fared better in this regard, the outcomes of these current reviews, particularly the Royal Commission, and the sector’s response will be important in shaping future perceptions of the industry. And so it is timely to reflect on the proactive steps the industry can be taking to ensure that it is well positioned and able to clearly demonstrate its focus on delivering quality, value-for-money outcomes for members.
In that context, this morning I will outline where we are at in respect of our proposed measures for strengthening member outcomes in superannuation and what we are expecting of trustees under the proposals. I’ll then comment briefly on what else is on the horizon for the industry from APRA’s perspective.
Strengthening member outcomes
In recent years the superannuation industry has (generally) delivered strong outcomes for members and made substantial improvements in its practices across a range of areas. Superannuation is very much a long term proposition, and the dynamic economic, political and demographic environment in which the industry operates cannot be ignored. The impacts of uncertain financial markets, persistent low interest rates, ongoing competition, fund consolidation and more members moving from the accumulation to the drawdown – or retirement – phase are being intensely felt by many trustees. So there is no room for complacency. All trustees need to be thinking about how they will need to improve what they do, so that they will be able to continue to deliver quality, value-for-money outcomes for members well into the future.
In response to the increasing complexity of trustees’ business operations and to address identified short-comings in industry practices, APRA is raising its expectations of trustee practices for strategic and business planning. These heightened expectations are reflected in our December consultation package, and also in our related supervision activities focusing on funds that appear not to be consistently delivering quality, value-for-money member outcomes across a range of metrics (often as a result of poor strategic and business planning).
A number of trustees already have well-embedded practices that are consistent with what we are seeking under the revised prudential standards. For a small proportion of the industry, however, substantial changes to their current practices will be needed.
Of course, you are all very familiar with the member-focused trustee obligations set out in the SIS Act, including the best interest duty and sole purpose test. We are aware of views that APRA’s measures may go beyond these obligations, described by some as having a primary focus on inputs (i.e. following an appropriate decision making process) rather than the outputs that may be delivered. We do not see it that way. Our current member outcomes proposals do not seek to change the obligations of trustees under trust law or the SIS Act. Rather, we see them as supporting trustees in meeting these obligations through clearly setting out practical actions that trustees can take to embed a member focus in all the decisions they make and the subsequent actions that follow. Surely it is reasonable to assess the outcomes of your decisions in order to determine whether or not your decision-making processes are suitably robust? We would find it hard to conclude that a trustee was meeting their obligation to act in the best interests of their members if they are consistently delivering relatively poor member outcomes.
Connection with the Government’s reforms
We have been asked why APRA is forging ahead with its proposals when the Government’s package of reforms, which also has elements focused on improving member outcomes, has yet to be legislated by the Parliament.
APRA’s changes to the prudential framework are independent of, but aligned with, the Government’s reforms. They reflect our observations of where improvements in industry practices are needed based on our substantial supervision activity and engagement with trustees over a number of years. And we see no reason to delay the implementation of these important improvements and the consequent enhancements to member outcomes that we expect them to promote.
APRA has indicated on many occasions that it supports the direction of the Government’s legislative reforms because they address weaknesses in the current regulatory framework and would strengthen APRA’s ability to respond to identified issues in an appropriate and timely manner. APRA will monitor their progress and consider any consequential changes that may be needed to the prudential framework, although we would not expect any material changes to be needed to the proposals set out in APRA’s December consultation package should the Bills be passed.
Implementing APRA’s reforms
I am sure that you will all have carefully read and digested our discussion paper and so would be familiar with the core elements of our package. In summary, trustees will be required to:
- set strategic objectives for their business operations;
- maintain a written business plan that articulates their approach for meeting these strategic objectives; and
- have robust expense management and reserving policies as part of business planning.
When conducting the proposed member outcomes assessment, trustees will be expected to:
- articulate the outcomes they seek for members and the metrics they will use to measure progress;
- undertake an assessment of these outcomes, in absolute and relative terms;
- determine the impact that features of their product offering and business operations have had on performance; and
- identify and pursue opportunities for improving outcomes, where cost benefit analysis justifies doing so.
We are encouraging trustees to view the member outcomes assessment, and the manner in which they carry it out, as a process of continual improvement. We want to see trustees taking meaningful steps towards putting in place a robust and objective assessment across all aspects of their business operations, using appropriate measures and analysis, and incorporating the outcomes of the assessment into their strategic and business planning process. But we recognise that implementing the assessment will be an evolutionary process, and that determining how a trustee is performing in a continually changing environment means that ongoing refinement of the member outcomes assessment, and strategic and business plans, will be necessary. Importantly, a set and forget, or compliance-focused, approach is not sufficient for your members, or acceptable to APRA.
What is needed to "pass" the member outcomes assessment?
But what will ‘pass the test’? What is needed to avoid being on APRA’s ‘outlier’ list?
It is important to emphasise that the member outcomes assessment is not a test to be passed or failed. Its purpose is to ensure that trustees continually strive to improve the outcomes being provided for their members. It seeks to provide trustees with an effective mechanism to allow them to better understand how they are tracking against the objectives and outcomes that they have determined are appropriate for their members, based on benchmarks and metrics relevant to those outcomes.
The key areas of trustee business operations to be considered in undertaking the assessment, such as investments, expenses, insurance, and member services, would be expected to be broadly consistent across all trustees and funds. However individual funds have different members and different strategies, and the scope and nature of trustees’ business operations varies. And so different trustees will have different outcomes that they are seeking to deliver; and hence the benchmarks and measures that are used for their assessments are also likely to vary. This is not a one-size-fits-all measure.
APRA will, of course, be looking closely at how a trustee goes about undertaking their assessment – the reasonableness of the outcomes the trustee is seeking to deliver, the benchmarks and metrics used to assess whether or not they have been achieved and the conclusions and actions that flow from it. This operational side is critical to ensuring the member outcomes assessment that is undertaken is robust, and that the objective of the proposed requirements – namely improved outcomes for members – is achieved.
We expect trustees to measure their outcomes against both absolute benchmarks, and relative benchmarks based on a meaningful peer group. It goes without saying that not every trustee can end up in the top quartile in all of the different areas considered every time they undertake an assessment. What is important, therefore, is that where areas for improvement are identified, the trustee puts in place actions to address them and factors these actions into its strategic and business planning.
Better practice guidance on designing and undertaking the assessment, including the selection of metrics and how the trustee may wish to consider segmenting its business for the purpose of the assessment, are set out in the draft prudential practice guide. The metrics in the draft guidance are the types of metrics that we would expect trustees to already be using in their business operations, such as investment returns, administration fees, insurance cover and costs and various ‘sustainability’ measures. We have highlighted a number of examples of the use of different metrics over the last six months or so, through the charts included in various letters, publications and speeches.
We expect trustees to already be contemplating the metrics they currently use to assess the outcomes they achieve for their members and what changes to these, or additional benchmarks and measures, may be needed to meet the requirements of the proposed prudential standard.
APRA also continues to examine the performance of, and member outcomes delivered by, trustees and has made good progress with the ‘outlier’ funds that we initially identified as appearing not to be consistently delivering quality, value-for-money outcomes or positioned for sustainability into the future. We will continue to evolve our approach, and look at different measures and metrics, as we engage with the industry as a whole, and with individual entities, with a view to continually pushing for improvements in the outcomes delivered to members into the future.
Where are we at in the consultation process?
Consultation is well underway since our August 2017 roundtables and the release of the consultation package late last year. Further discussions with industry are taking place today, and more roundtables will be held over the next few weeks before submissions are due at the end of the month. I’m pleased to say that, to date, there seems to be general acceptance of the purpose and intent of APRA’s proposals, even if there is felt to be room to adjust some of the more detailed aspects of the proposals.
I encourage interested stakeholders to provide insights during the last few weeks of this consultation period. We would particularly welcome your thoughts on how well the proposals will support achievement of the objectives we are seeking, namely improved strategic and business planning practices, strengthened oversight and transparency of expenditure and enhanced outcomes for members. We also want to receive information on the practical aspects of implementing the requirements, and the costs to industry of doing so – over and above the business-as-usual costs of sound strategic and business planning and performance assessment practices.
What else is on APRA’s agenda?
Over the past 12-18 months, APRA has undertaken two targeted thematic reviews across the superannuation industry, looking in depth at how trustees have implemented some of the requirements of the prudential framework that were introduced in 2013.
The first focused on related party arrangements, building on APRA’s 2014 conflicts management thematic review which identified that significant improvements in practice were needed by many trustees. This follow-up review considered the prudential standards relating to conflicts of interest and outsourcing, as well as the extended duties in the SIS Act to give priority to the interests of beneficiaries over the interests of the trustee or other persons.
While we have noted some improvement in the management of conflicts of interest, there remains more to do, particularly in relation to the management of related party arrangements. It was also evident that there were wide variations in interpretation of the nature of relationships to be captured under the policies and frameworks, and also the information to be reported to APRA based on the definitions of “associated” and “connected” entities. This is an area that we will be looking at again, with a view to clarifying and strengthening the relevant standards, as part of the post-implementation review of the prudential framework.
The second thematic review considered board governance practices in the context of the 2013 prudential standards, the extended trustee duties and recent refinements to APRA’s prudential framework for governance relating to Board composition and nomination, appointment and removal of directors. I provided a brief overview of the outcomes of this review in my AIST speech in October 2017, which is available on APRA’s website.
Thematic reviews seek to highlight better practices and opportunities for improvement. We will be releasing summary findings from both of these reviews to the industry in the very near future, so watch this space.
Post implementation review
When APRA introduced the prudential standards in 2013, we committed to reviewing our frameworks a few years after implementation to see whether they were achieving their intended goals, remained fit for purpose and supported efficient and effective supervision.
We have therefore recently commenced a post-implementation review of the prudential and reporting frameworks for superannuation. We have already identified some areas for attention, but will also be seeking input from stakeholders through a range of forums and consultation mechanisms over the coming year, to ensure we capture a wide range of views. We welcome your input into this process.
We are targeting the release of the outcomes of the review by the end of 2018, giving an indication of areas where we may propose to make modifications to the prudential framework. Any changes that follow would be subject to our usual consultation processes.
We expect that there will be some changes to the reporting standards as a result of the review, and also to implement aspects of the December member outcomes package. So let me also just quickly draw your attention to our current consultation on replacing D2A with an alternative data collection solution. We are very keen to have wide stakeholder engagement on this and so I would encourage you to go to our web-site, look at the material that was released on this project last week and participate in the consultation process.
New prudential standard on IT security
This week APRA released a new cross-industry prudential standard on IT security for a twelve-week consultation period, reflecting the importance of this topic across all of our regulated industries, including superannuation. My colleague, Geoff Summerhayes, gave a speech to the Insurance Council of Australia’s Annual Forum yesterday that provided some background to what we see as an accelerating risk, and outlined some of the key elements of the proposed standard.
Submissions close mid-year, so we look forward to exploring this important area of reform with you over the coming months. APRA aims to finalise the new standard in November, ahead of industry implementation from 1 July next year. This relatively quick timeframe reflects both the growing cyber threat, and APRA’s confidence that industry should be fairly well-placed to meet the standard given the existing guidance in this area.
Post retirement products
APRA is keeping in close contact with Treasury and industry on post-retirement matters and this will definitely be an increasing area of focus for APRA in 2018. The cross-agency process set up jointly with the ATO, ASIC and DSS to review new innovative retirement products is well-underway, with applications already received and considered by the participating agencies from a few superannuation entities. The process appears to be working well so far, and is also providing useful information about prudential framework changes that may be needed down the track in relation to the design and oversight of these products.
Insurance in Super Working Group (ISWG) – Code of Practice
Finally, let me say a few words about insurance in superannuation.
The Code of Practice that was released late last year was a significant industry-led effort and APRA welcomes it as an important step forward. It sets minimum benchmarks across a wide range of areas relevant to insurance management, which we expect will lead to better insurance outcomes for superannuation fund members over time.
But there is more to do, both to strengthen the enforceability and oversight of the Code and also to tackle some of the areas that the current Code has not fully addressed. These include looking at opportunities to clarify and standardise definitions for disability insurance, and dealing more fully with multiple accounts and unnecessary multiple insurance cover. It also includes fuller reconsideration of the role and level of default insurance through MySuper, consistent with the objective of MySuper products being simple, comparable and low cost and the obligation of trustees to ensure that there is not undue erosion of members’ retirement benefits.
We acknowledge that tackling some of these issues is challenging, and will require a concerted effort by the industry working in partnership with the life insurance industry. But it is an important step for the industry to take in the best interests of your members, and to reduce the risk of potentially material reputation damage for the superannuation industry (such as we have seen play out over recent years in the life insurance industry).
APRA therefore encourages all trustees to consider adopting the Code, and to review their insurance arrangements against its provisions – and where possible to do so more quickly than envisaged by the relatively lengthy timeline for implementation. We would also encourage you to think about where you should go further than the minimum provisions set out in the Code, with a view to further enhancing the outcomes being delivered to members.
There is clearly potential for future, improved iterations of the Code, building upon the work done so far and we look forward to seeing the industry commit to tackling this challenge.
It is clear that 2018 will be another busy year for the industry, and for APRA.
However, as I said at the start of my comments this morning, the sector’s response to the scrutiny and challenges that lie ahead will be important in shaping future trust and confidence in superannuation. It is therefore important that the industry is on the front foot, and continues to look for ways to improve practices so that it is well positioned and able to clearly demonstrate its focus on delivering quality, value-for-money outcomes for members.
APRA’s prudential reforms and supervision actions seek to support the industry to achieve this. After all, it is in all our interests that the superannuation industry is stronger, more sustainable and consistently delivering better outcomes for those it’s designed to serve – your members.