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APRA's regulatory radar

Friday 24 March 2017

Helen Rowell, Deputy Chairman - Conference of Major Superannuation Funds (CMSF), Sydney

Superannuation is a crucially important source of retirement income for the Australian public, and this places significant expectations on the performance of superannuation trustees. As total superannuation assets continue to grow, and the importance of superannuation to Australia’s overall wealth increases, maintaining public confidence and trust in the superannuation industry is absolutely vital.

In recent years the superannuation industry has, by and large, demonstrated good intent and a positive commitment to meeting the heightened expectations outlined in the revised superannuation legislative framework, and in particular APRA’s prudential standards. However, the industry is quite diverse and the range of practices is wide. Some trustees have further work to do, and run the risk of lagging behind as the pace of industry change, and increases in complexity of the superannuation operating environment continue.

Trustees today are running more complex financial service businesses, and accordingly need to adopt the sound governance and business management practices that are expected of such businesses by financial sector stakeholders and the wider community. That means that all trustees must move beyond a focus on just meeting minimum legislative requirements, to an approach that seeks to embed the principles of the prudential standards into their business practices, meeting the spirit and intent and not just the letter of the standards. Doing ‘just enough’ is not good enough to meet member and community expectations. And there is no room for complacency - all trustees need to review and enhance their operations and practices on an ongoing basis.

There are many specific areas that I could touch on today, but I will focus on just three: governance, sustainability and performance assessment. Hopefully there will be time to cover other important areas – such as insurance in super – in the Q&A.


Governance has long been, and will continue to be, a key focus for APRA in discussions with all APRA-regulated industries, and superannuation is no exception.

All trustees are obliged to act in the best interests of their members, regardless of their business model. That means that directors of retail (or so-called for-profit) trustees must seek to ensure the delivery of appropriate member outcomes – high quality, value for money benefits and services - notwithstanding the potential conflicts that may arise from the profit objectives of their parent entity. Similarly, directors of industry, corporate and public sector (or not-for-profit) trustees face potential conflicts with the interests of their stakeholders, including shareholders, that must be identified and managed, so that the primary consideration is at all times on delivering of high quality, value for money benefits and services to members.

I have spoken on many occasions on APRA’s observations on governance practices in the superannuation industry. Whilst there are some very good practices, APRA’s experience is that there is room for improvement for many funds across all segments of the industry, with some board practices failing to live up to expected standards of good governance. A particular current area of focus is practices for board selection, appointment and renewal. Not all trustees have clear policies or approaches on key areas, such as the skills and capabilities that are needed on the board, and how to ensure that they get the right balance between experience and renewal on boards. We would encourage all boards and nominating bodies to look broadly in determining where the potential pool of director candidates is coming from, and to strengthen board performance assessment and follow up actions to ensure that all directors are adding value to board decision making.

You will not be surprised to hear that our views on board composition and renewal have not changed. We firmly believe that all boards benefit from having some independent directors, to provide access to a wider range of skills and experience and enhance decision-making and constructive challenge. Being independent as a director, however, is not enough — all directors must bring appropriate challenge, experience and a robust decision-making approach, and be able to act in a manner that is not influenced by conflicts. To achieve this, all segments of the superannuation industry have an obligation to look broadly to identify directors that will bring the requisite skills and capabilities to the board, and also to ensure that there is appropriate renewal of directors through setting specific terms of appointment and implementing tenure policies.

Good governance cannot be assessed solely in terms of investment outcomes. APRA supervisors closely review the appropriateness of decision-making processes, effectiveness of oversight of all aspects of fund operations (including conflicts management), responsiveness to challenges in the operating environment and demonstrated focus on all aspects of meeting member best interest obligations.

At an operational level, we have observed some laxity of governance and oversight practices by boards in relation to their business operations, particularly in relation to board and fund expenditure and also related party arrangements. The combination of poor processes and oversight, and slowness or failure to take action when issues are identified, leads to inappropriate costs being incurred that will ultimately negatively affect outcomes for members. Even small amounts of inappropriate expenditure can have a big impact over time. We expect trustees to have processes in place to ensure rigorous decision-making, monitoring and oversight, and transparency around how members’ money is used. That includes an ongoing focus on ensuring that all expenditure has a clear purpose or objective, with appropriate assessment and monitoring of whether or not that expenditure has achieved the intended objectives and appropriate outcomes for members.


We continue to discuss with trustees their approach to future sustainability. This is about more than simply maintaining growth in assets and membership or sustaining the trustee’s business. Trustees must implement sufficiently robust strategic and business planning processes with a view to ensuring that their fund or funds will deliver high quality, value for money outcomes for members over the medium and longer term. Operating in what is an increasingly complex environment, trustees need to be aware of and proactively considering how they will respond to the challenges that will arise, now and into the future, to ensure their funds remain ‘fit for purpose’.

That means having the scale, capacity and resources to deliver on their obligations to members on an ongoing basis - which requires sound planning taking into account a range of plausible scenarios; disciplined monitoring of progress against those plans; and taking prompt corrective action when underperformance is identified. Not all trustees are doing this adequately. Key improvements in practices that we would like to see include: setting more realistic plans and targets, reflecting past progress relative to plans; considering a range of plausible scenarios in planning, not just a ‘best case’; adopting more robust assessment and monitoring of progress using a wider range of measures; and taking more decisive and timely corrective action when needed.

Which leads me to the question of industry consolidation. The decision to merge or wind-up a fund is for the board to make. We continue to observe, however, considerable reluctance by boards to acknowledge that it is in the best interests of their members to pursue a merger or wind-up their fund. On the contrary, some boards set their business plans and assess their performance against targets in a way that perhaps too readily allows them to conclude: ‘Things will improve if we do this’, even when past experience of performance against plans suggests otherwise.

We acknowledge that it can be difficult to reach the decision to exit, and that there may be some challenges associated with finding a like-minded merger partner. But that does not mean that these important decisions should be avoided, or that (perhaps somewhat short term, self-interested) reasons found to avoid proceeding with fund mergers that otherwise appear to be in members’ best interests.

Assessing performance

Of course, a key aspect in considering future sustainability is assessing past, and likely future performance, and ensuring that underperformance is addressed. Fund performance must be considered over the medium to long term, and in a multifaceted way that goes beyond just looking at net investment returns – as important as that is to member outcomes.

Again, I have spoken in a number of forums about the need for trustees to undertake a broad ‘member outcomes’ assessment, including consideration of net investment returns, expenses and costs, insurance, and other benefits and services provided, at the very least. When APRA comments on underperformance by superannuation funds, it is based on consideration of outcomes for members in all of these areas. It also takes into account our assessment of more qualitative aspects such as governance and risk management practices, and the approach taken to strategic and business planning. Also, as members join individual funds or products, we focus on assessing performance at that level, as it is more meaningful in considering outcomes for members than the average performance of funds in different industry segments (however defined).

We are ramping up our engagement with boards on their approach to ‘member outcomes’ assessment, and the actions taken in relation to identified areas of underperformance, in relation to both MySuper products and the funds under their oversight more broadly. We now have much better data on the industry, that is providing us with a more comparable, reliable and consistent basis to assess how funds are tracking than we have had in the past. What this data is telling us is that at a fund or product level across all segments of the industry, there are better performers, as well as underperformers with room for significant improvement.

Business models vary significantly across the range of funds operating in the APRA-regulated superannuation industry. But all trustees must be able to run their businesses so they can meet their obligations to fund members, as well as pay their staff and fulfil their contractual obligations with service providers – and hence set fees and charges to cover costs accordingly. What is most relevant in assessing performance is the end outcomes for members in providing for their retirement. And that comes down to the money that is put in, the investment return that is earned and the costs that come out – irrespective of the business model of the fund charged with delivering those outcomes.

Concluding remarks

Every trustee has an enduring obligation to strive to do better for their members – day in day out, year in year out, in all aspects of their offering. It is important that the industry as a whole holds all of its participants to account on this - no segment of the industry can afford to be complacent.

Given its critical role in retirement income policy, it is important that the superannuation industry promotes an industry culture with the best interests of members at the heart of all its decision making. To maintain public confidence and trust in superannuation, I would encourage all of you to focus less on criticism within the industry and more on delivering better outcomes for members regardless of the type of superannuation fund members may find themselves in.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.