Reflections on a super year
Thank you for the opportunity to be here today at ASFA and once again I’m pleased to be sharing the stage with Danielle and James.
With only 40 sleeps until Christmas, I am sure the majority of you here feel very much like me – it can’t come soon enough.
In thinking about what I would say to you today, I wanted to use the letter we issued to industry in March this year as a point of reflection for what has been achieved and as a base for considering what more there is to do. This letter covered areas where we expected industry to lift and do more and also areas where APRA was looking to drive change or uplift internally.
What I won’t cover today is the soon to be released MySuper heatmap. I know this is front of mind for trustees and the broader industry at the moment, however you will need to wait until tomorrow, when Helen Rowell will reveal all in the first session of the day.
So… 2019! I don’t think anyone will disagree that 2019 has been another significant year – that applies to both the superannuation industry and APRA as well.
On March 27 this year, APRA issued a letter to trustees titled “Putting members first – expectations and areas of focus for the year ahead”.
Assessing and improving member outcomes was number one, and this is now the foundation of the new prudential standard SPS 515 – Member Outcomes and Strategic Planning. The standard commences from 1 January 2020, requiring trustees to undertake an annual Business Performance Review, a component of which will include the new legislated Outcomes Assessment enshrined in the Superannuation Industry (Supervision) Act (SIS Act).
With the final prudential standard released in August this year and the last stage of guidance set for release in the next few weeks, APRA expects trustees to be well advanced in their thinking about strategic planning, cohort construction and benchmarking of performance.
Supervisory engagement to date suggests that entities with more sophisticated and robust strategic planning processes are further advanced and better placed to implement the new requirements. There is also evidence of good work being done to understand membership cohorts, based on key characteristics and demographics, to provide greater insight into the needs of the trustee’s membership base.
Choice products and benchmarking have raised the most concerns and questions for trustees. While we acknowledge that, absent the pending SIS regulations, there may be challenges in undertaking the Business Performance Review and Outcomes Assessment for choice products, and particularly for wrap platform products, this should not preclude trustees from using their best endeavours to undertake meaningful benchmarking and peer comparison. Our expectation is that trustees give effect to the requirements in a genuine and thorough manner, to fulfil trustees’ fiduciary obligations and to truly put members’ interests first.
Pleasingly though, the term “member outcomes” is now more commonplace across the industry and the narrative is shifting towards members being the key focus in the decision-making processes of trustees.
Trustee board capabilities and culture was the second key area noted in the letter and this has also been a significant focus in our prudential engagement work this year. However, this remains an area where we think many trustees have more to do. With a mandate to preside over billions of dollars of members’ money, it is essential that trustees have a board with the right mix of skills and capability and importantly, that the people on the board are up to the job in terms of both capability and commitment. This is not about set and forget; rather, it needs to be a dynamic and forward-looking process linked closely to the strategic planning of the trustees.
Importantly, our expectation is that boards are committed to mandating director tenure limits. With proper and early succession planning, use of ‘exceptional circumstances’ should be more on the ‘rare and unusual’ side, as opposed to commonplace practice. With new business models emerging and the investment and operating environment growing in complexity, the dialogue with shareholders needs to be focused, front and centre, on capability and skills of directors, with an important consideration being to balance the need for continuity and experience with fresh perspectives.
Stronger and earlier dialogue with shareholders in relation to future board representation in the face of merger opportunities is an area where trustees need to do more. For every merger that is getting past the board composition hurdle, there are others that are continuing to find this a significant stumbling block.
In the area of risk governance, we are pleased to see several of the large funds leading by example and elevating the positon of Chief Risk Officer to the executive team, beyond the minimum standard outlined in SPS 220. In many instances, this has been coupled with revisions of risk management frameworks to better embed the three lines of defence across the organisation.
We will continue to focus on the strength and depth of risk practices across our regulated entities, through our supervision activities and leveraging our dedicated team focused on governance, risk culture, remuneration and accountability (otherwise known as GCRA). As stated very clearly in our letter, APRA does not see any rationale for a modern and mature financial institution not to have an independent and well-resourced risk function, including a Chief Risk Officer with a direct reporting line to the CEO and regular access to the board and board risk committee.
Conflicts of interest featured heavily in the findings of the Royal Commission and have been a focus of our work this year. Trustees are directly accountable for meeting members’ best interests regardless of corporate structures and APRA has commenced work on an in-depth review of trustees’ management of outsourcing arrangements – with a focus on related party arrangements – across a group of large superannuation entities, covering a significant portion of members across the industry. This follows our work in taking a snap-shot of information on the terms and costs of outsourcing arrangements across the broader population of trustees undertaken in the second half of 2019. We intend to publish a summary of the information obtained, and the in-depth review, in due course. In doing so, we will consider how to provide greater transparency on the findings across entities covered and the assessment of their practices.
Conflicts of interest have also been captured as part of the work that industry was asked to do following the issuance of the joint letter from APRA and ASIC around fees charged to superannuation members. APRA and ASIC are assessing the responses from these submissions and will be sharing outcomes in the New Year.
In relation to data and reporting, accurate and timely data plays a vital role in enhancing the superannuation industry’s transparency. It allows trustees to be held to account for the outcomes they deliver to members, helps consumers make informed decisions and ensures all stakeholders can draw meaningful conclusions on industry performance.
Last week, APRA released for consultation a discussion paper on the Superannuation Data Transformation program, which is a multi-year project to upgrade the breadth, depth and quality of our superannuation data collection. This is a three phase program, the first stage of which will address the most urgent data gaps required to support APRA, the industry and other stakeholders in assessing member outcomes and trustee performance.
A key area for improvement for Phase 1 will be to boost coverage of the data collected for the superannuation industry, particularly to include all choice products and investment options. Improving visibility of product-level and investment option-level data beyond MySuper products is required, in addition to more granular and comparable reporting on fees, costs, expenses and returns. Other areas of improvement will include expense reporting, member demographics and asset allocation classifications.
At each phase, APRA will be collecting pilot data to “test” our collection design and refine the revised reporting requirements, and hence help support industry with the implementation of this more granular and broader data collection. Ideally this will enable sharing of some data by mid to end of next year. The paper on the first part of the Phase 1 is currently open for consultation until mid-January, so we encourage you to provide any feedback and input you have.
In addition, APRA has a project underway to replace the current data collection system, D2A, with an easy to use solution to collect high quality data that is adaptable to future business needs. The new data requirements we are seeking will ultimately be delivered to APRA via this new platform and we anticipate this will significantly progress industry maturity in data collection, enabling efficiency for submissions. I would also share with you that APRA is working close with ASIC and other agencies to incorporate their data into our new requirements on a collect once and share principle. Through this work we hope to increase the efficiency and effectiveness of your reporting and drive consistency in data definitions across the industry.
APRA has also undertaken significant activity in the related areas of accountability and remuneration. In July, we released a draft prudential standard aimed at clarifying and strengthening remuneration requirements in APRA-regulated entities. Consultation on this standard closed at the end of October and we are currently working through the large number of submissions we received. Given that the package of measures is materially more prescriptive than existing arrangements, we were expecting a degree of pushback from industry and investors – and we haven’t been disappointed. As APRA Chair Wayne Byres observed in a speech only yesterday: “Our proposals have generated much interest, and considerable angst – problematic, misguided and unworkable are some of the epithets used”.
It’s important to remember that this consultation stems from clear and repeated evidence that existing arrangements were often producing outcomes that were not only detrimental to consumers, but to the long-term interests of the institutions themselves – the status quo is not a viable option. In the absence of agreement within industry on how APRA’s proposals could be modified, it’s clear that landing on a balanced position that makes all stakeholders happy is unlikely. But if the new prudential standard helps regulated entities to develop appropriate incentives, improve accountability and support the effective management of financial and non-financial risks, then we will be happy with that.
The other side of the remuneration coin is accountability, and here APRA has been deep in preparation for the expected extension of the Banking Executive Accountability Regime to super and other regulated entities. APRA has established a separate accountability unit to undertake APRA’s policy and implementation work for the extended accountability regime, and will be working closely with ASIC as the details of the requirements are developed and rolled out. While there is still clarity required around some of the specifics of the accountability regime, our expectation is that trustees will focus on having in place a clear accountability and consequence management regime.
The changes in relation to insurance in super have demanded a lot of focus and energy across the industry this year. The staggered implementation of the Protecting Your Superannuation Package and the Putting Members’ Interests First Bill has created a lot of angst and uncertainty across the industry, and we know that trustees are working hard to meet the deadlines imposed.
APRA has worked closely with Treasury and ASIC to provide clarity to industry, through the issuance of Frequently Asked Questions, recognising that the Government intends to amend some aspects of the new laws to effect the original policy intent.
So, while it has been a big year for industry and APRA, it has been a year of good progress in many areas. However, we know our job is not done and there is plenty more to do, so if you have the opportunity to have a break at Christmas, I encourage you to do so as 2020 will be another busy year.
So where to from here?
Looking ahead to next year, what we expect is a continuation of what has been the prevailing environment of the last few years (at least), with ongoing political and economic uncertainty. And there will be no let-up in our increasing expectation of trustees around the delivery of improved outcomes for members and importantly making good judgements around the risk return trade-offs.
The pace of regulatory change has been rapid and we expect that to continue, particularly given the intent of the government to implement legislative change to effect the recommendations of the Royal Commission as quickly as possible.
As we continue to see changes to business models and fund structures and shifts in the ecosystems that trustees are using to deliver change, we urge trustees to stay vigilant. It is crucial that trustees look at the whole picture to manage the risks and the sizeable projects that more and more trustees are undertaking in response to the increasing complexity of, and competition within, the industry.
Investment markets are likely to challenge trustees. After 10 years of strong returns, and interest rates continuing at an all-time low, trustees will be considering where and how to generate returns. Trustees also need to consider their approach to incorporating ESG factors into their investment strategy, the growth of investments through private markets and increasing need for offshore investing. This will be coupled with greater scrutiny of fees and expenditure, also now legislated in the SIS Act. This will require a disciplined focus on strong investment governance, with robust due diligence and reporting that enables a clear understanding of the risk/return trade-offs being made and outcomes achieved.
Cyber risk will continue to challenge trustees and vigilance around fraud in superannuation needs to be at an all-time high.
Right-sizing your business for complexity in advance of growth, rather than after the event, needs to be more than a strategic consideration, as we expect you to be continually asking the question: “Can our business keep pace with the scale of organic or inorganic growth and do we have the infrastructure in place to support it?”
We expect to see further industry consolidation and we strongly encourage the current momentum of merger discussion and activity. For trustees of funds that are underperforming and sub-scale, our message is “Don’t wait – get your exit strategy in place well in advance of your members suffering from your inactivity and further deterioration in performance”.
We also encourage trustees to focus on simplification – driving consolidation at the product level should be a priority. With over 40,000 choice products in the market, the complexity for the consumer is overwhelming, and trustees should be considering simplifying their offering.
In the New Year, APRA will share our focus areas for calendar year 2020, many of which will be a continuation of what industry has been working on across 2019. APRA will continue next year to work closely with our peer regulators, particularly ASIC, to drive uplift across the industry. As regulators, we acknowledge that there is often a lot of regulatory change impacting your business concurrently. Coupled with the pace of legislative change from the government, we know this can be challenging to manage. The discussion around the regulator table is about how we can get greater visibility of what agencies are planning so that, wherever possible, we can align, sequence or collaborate to reduce the impact and impost.
In closing, I’d like to update you on APRA’s new organisational structure. On 1 December 2019, APRA will move to a new structure organised along industry lines, meaning we will have a division dedicated to superannuation. Front and centre of the strategy for APRA and this division is improving outcomes for superannuation members.
I am certainly very proud to have been appointed to lead this division. Coupled with the committed, experienced and passionate team of colleagues across the organisation, the new powers we have in relation to superannuation and the recognition by industry that they need to do more, I feel very confident that superannuation fund members will be the beneficiaries of this change.
Along with this, and ensuring greater consistency in our approach to supervision of all super funds across the industry, our expanded team will allow us to leverage and deploy the skills, knowledge and expertise within APRA to undertake deeper and more extensive supervision work. Our supervision intensity will not only focus on those large and high impact entities but importantly, those who continue to underperform and as a result are failing to deliver for members. There will be nowhere to hide. Aligned to our enforcement approach to be a “constructively tough” mindset. Trustees can expect to see our escalating supervisory intensity, which will incorporate both qualitative and quantitative (heatmap) information/assessment.
Together with industry, APRA is working hard to deliver meaningful change for all Australians.
Not only is it our job. It is the right thing to do.