Helen Rowell, Executive Member - Conference of Major Super Funds, Queensland
Good afternoon everyone, it is a pleasure to be here.
It is an interesting time for the industry. The Government response to the FSI recommendations that are relevant to superannuation, together with the outcomes of the other reviews yet to come (and in particular the Tax White Paper process), will set the stage for potentially radical changes for the industry in the coming years and pose some significant strategic challenges for the superannuation industry to grapple with.
APRA’s focus is on the prudent management of superannuation funds by APRA-regulated trustees, and so the ability of trustees to effectively manage the risks posed by current and emerging strategic challenges facing the industry is of considerable interest to us.
In that context, today I’d like to make a few observations on governance and conflicts of interest, remuneration disclosure, retirement income options and industry efficiency and performance. Many of these were touched on in the FSI report and will be areas of ongoing focus for APRA.
1. Governance and conflicts of interest
As you would all be well aware, a priority for APRA over the last few years has been implementation of the Stronger Super reforms. At heart, the new prudential framework underpinning these reforms is aimed at enhancing the governance and risk management practices of the superannuation industry.
APRA’s experience to date suggests that, while progress is being made, further improvements are needed in a range of areas. Our initial thematic reviews (focused on conflicts of interest and insurance management) have highlighted the wide range of practices being adopted across the industry. While we identified some examples of good practice, the reviews indicate that further work is needed by many funds to meet the expectations set out in APRA’s prudential standards.
I won’t say much about the insurance thematic review today, other than to note that the overall outcomes were better than for the conflicts thematic review, with many fewer funds being assessed as vulnerable or weak in key areas. Nevertheless, the review highlighted a number of areas where enhancements are needed. You will hear more from us on this review in the coming months.
For the conflicts thematic review, around a third of the approximately 40 funds that we reviewed were found to have conflicts management frameworks that were assessed as vulnerable or weak. Individual trustees that were included in the review will have received feedback on any specific issues identified. We will also be issuing a letter this week outlining some of the key areas highlighted by the review that we expect all trustees to consider as they review and enhance their conflicts management frameworks.
I would also note some of the superannuation-related issues emerging from the Royal Commission into trade unions that are relevant to conflicts management, particularly in relation to related-party arrangements. APRA will be taking a very close look at industry practices in this area, across industry and retail funds, and will be expecting to see robust practices in place.
Arrangements with related parties can, when well structured, designed and priced, have benefits for members. However, where trustees have (or are considering) related party arrangements, we expect trustees:
- to be able to demonstrate a sound understanding of any such arrangements, and in particular the nature of the financial or other commitments that they entail,
- to have undertaken a rigorous process to assess the appropriateness of the arrangements in the context of the trustee’s member best-interests obligations, and
- to review and monitor the arrangements on an ongoing basis to ensure they remain appropriate and are meeting their objectives – and in particular that they are providing the expected benefits for fund members.
So we would encourage all trustees to have a long, hard look at any related party arrangements that they may have and assess whether or not they meet these expectations.
As was clearly demonstrated by our conflicts thematic review, governance, risk management and risk culture are inherently linked. It is very difficult to have robust governance practices if the risk culture of the organisation is poor. The trustees with weaker conflicts management arrangements generally also tended to have weaker overall governance and risk management practices, and a risk culture that was more compliance focused than aimed at meeting the spirit and intent of the prudential requirements.
The role of the board and senior management are critical here. Senior management has responsibility to implement sound governance and risk management frameworks. It is the role of the board to provide strong oversight and robust challenge to management, to ensure that the risk frameworks are appropriate and effectively implemented, and that a sound risk culture is being adopted across the funds under their oversight.
That requires a wide range of skills and capabilities on boards. So trustees need to draw from a broad pool when appointing directors, and foster independence of view and approach by all directors.
APRA’s experience, over many years and across all industries, suggests that having at least some independent directors on boards best supports sound governance outcomes. However the appointment and selection processes for directors, and the implementation of regular and robust board and director performance assessments, are also key. We would expect this to be an ongoing area for focus and enhancement by trustees. That is, we would encourage robust director appointment and board renewal processes that seek to ensure that boards have the breadth of capability needed to meet their obligations to members into the future.
2. Remuneration disclosure
Another area where new requirements are in place is in relation to disclosure of remuneration for directors and executive officers. APRA has recently undertaken a review of a sample of funds to ascertain the quality and consistency of the information being disclosed on fund web-sites and reported to APRA under the new reporting standard (SRF 600.0). I would have to say that we were somewhat disappointed with what we found!
For example, there were a number of anomalies and apparent errors in the reporting of remuneration on fund web-sites and to APRA; a significant number of directors for whom nil amounts were reported; and a handful of funds where we were unable to find the director remuneration information on their web-sites!
The disclosure of director and executive remuneration is an important element of the enhanced transparency obligations for the industry and it is clear that there is considerable room for improvement. So we will be following up on this, and I’d suggest you ensure your reporting is up to scratch.
3. Retirement income options
As noted by the FSI, the focus of superannuation should be on provision of adequate income throughout retirement, whereas currently there is much more focus on the accumulation of wealth up to retirement. As you would all know, the available product set for providing retirement incomes is currently limited for a range of reasons. These include various tax and age pension policy settings, however it also reflects individual member preferences and choices and the approach adopted to date by trustees and funds.
APRA sees merit in funds offering retirement income options and communicating to members based on estimated retirement income amounts, rather than accumulated lump sums, as this would help to change member thinking and decision making about retirement. Ideally there would be changes to policy settings to encourage the availability of a more flexible range of products to address the various risks in retirement (such as sequencing and longevity risk) and hence meet the differing needs of retirees. One single product can’t do this, particularly as member needs change through retirement. However, even in the absence of policy change, there is much that funds and trustees can do to shift the focus of members from the accumulation phase to the retirement phase.
Indeed, many trustees are already moving to offer pension options, and in doing so need to carefully consider what options (or set of options) might be appropriate for their members. This will be even more important if the FSI recommendation for funds to be required to offer a comprehensive income product for retirement (or CIPR) is implemented.
From APRA’s perspective, some of the key prudential issues for trustees to consider in offering pension options relate to the design of the option, the investment strategy implications and the other supporting systems and processes that are needed.
On design, APRA is particularly concerned as to whether any form of guarantee is involved and who is providing that guarantee. APRA-regulated funds wishing to provide any form of guarantee as part of their retirement income options need to look, for example, to using products provided by a life insurer that has adequate capital to back the guarantee. Other pension options have discretionary features that fall short of a guarantee but rely on pooling and redistribution within the fund to supplement the income that may be payable to a particular retiree. How these arrangements are structured, and the monitoring and risk management arrangements in place for them, is also important and will be something that APRA would look at very closely.
Retirement income options involve different investment considerations and trustees need to consider the appropriate investment strategy to back the pension options that they provide. In particular, the cash flow or liquidity implications of needing to meet regular cash outflows are very different to those for members in the accumulation phase. We would expect these differences to be appropriately reflected in the trustee’s investment strategy.
Finally, the administration and other systems needed, and the resources required to be able to manage provision of pensions is an important consideration, as is the advice model that may be needed.
APRA therefore expects that not all trustees will want to (or be able to) directly offer pension options to their members and some will need to, or will choose to, partner with other providers. Of course, robust governance and oversight arrangements around those partnerships will be needed!
4. Industry performance and efficiency
Let me turn briefly now to a few observations on performance and efficiency.
The FSI report focused on enhancing the efficiency of the superannuation system, which is an important objective. However, as we noted in APRA’s submission to the FSI, it is important to focus on overall outcomes achieved, and not just fees and costs, when considering whether or not the system is effective and efficient, and how it is performing. That is, to assess the overall performance of the superannuation system a range of performance measures or attributes need to be looked at, such as the net return achieved over the long term, the level of retirement income that is delivered, and the other benefits and services that are being provided.
There are parallels here with what APRA expects trustees to do in undertaking the annual “scale assessment” that is now required of each trustee that offers a MySuper product. This “member outcomes assessment” is a new process for the industry and we will be looking at how trustees are tackling it as part of our supervision activities.
This assessment is not just about fund size or fee levels or investment returns. We expect trustees to have in place a robust framework, with clear criteria that address a wide range of aspects of the fund’s operations in forming a view as to whether members in their fund are disadvantaged relative to members of other MySuper products. Further, in looking at investment performance, long term returns relative to the investment objective that has been set should be the key measure, rather than short term peer comparisons.
There are significant complexities in the superannuation system and so there is scope for efficiency to be enhanced through simplifications in many areas. At an individual fund level, for example, trustees could look to reduce fees and costs through simplifying their investment arrangements, reviewing the insurance benefits provided or making other design or operational changes. To give just one example, when APRA was recently looking at its reporting requirements for select investment options we were staggered to note that there are over 40,000 investment options made available across the industry. It is hard to believe that all of those options are really needed!
There are clearly trade-offs for trustees to consider here – between providing choice and flexibility for members on the one hand, and targeting simplicity and potentially reducing costs on the other. We would nevertheless encourage trustees to give these issues, and the steps they can take to achieve an appropriate balance, some consideration as they think about their future strategy.
So, I have briefly touched on just some of the current and emerging challenges for trustees, and provided some APRA perspectives on them. All trustees need to be looking ahead, identifying the key challenges relevant to them and proactively considering how they plan to tackle them. We look forward to engaging with you on your future strategy over the coming months!