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The future regulatory landscape

Wednesday 13 November 2013

Helen Rowell, Executive Member - ASFA Conference, Brisbane

Good afternoon everyone, it is a pleasure to be here today and I’d like to thank ASFA for inviting me to participate in their conference.

Many of the themes touched on by the Minister in the interview we just saw are consistent with the areas I will cover today – governance, the need for professionalism in the industry, and the fact that superannuation is to provide for retirement and so a longer-term and considered focus is needed.

The conference theme is "Beyond the Horizon", and I have been asked to outline for you APRA’s perspective on the future superannuation landscape. What are the global trends that may be relevant? What will APRA’s approach to governance and regulation be in future, and what will be the impact of current and future changes on the superannuation industry?

You will be pleased to hear that we do not see any major international regulatory trends that are likely to lead to significant changes to APRA’s prudential regulatory framework for superannuation in the near term. Over the last few years there has been a fairly universal focus by regulators globally on strengthening the governance and financial soundness of all parts of the financial sector, including superannuation (or pensions). That focus is likely to continue, and is entirely consistent with APRA’s approach in establishing the recently completed prudential framework for superannuation.

Our focus now is turning to effective implementation of the recent reforms. That too is consistent with increased international focus on the effectiveness of supervision. Having rules and regulations in place is not enough – their effective implementation in practice also needs to be proactively overseen by supervisors.

Australia’s retirement income system is well positioned globally, for example based on its high ranking in the 2013 Mercer global pension index. However there are some aspects of the system where improvements could be made to further support the achievement of retirement income objectives over the medium to long term. For example, how we manage the transition from the accumulation phase to the post-retirement phase is an area that needs more focus over the coming years. This is likely to need some support from the Government through policy reforms and we (and no doubt others) have suggested that this would be a good topic to include in the financial system inquiry.

However it is also important that the industry looks to international developments in this area, draws from them and innovates in its product offerings. For example, are there aspects of concepts such as defined ambition pensions and target income solutions that should be considered for the Australian system?

As I have noted in other fora, the size and complexity of the superannuation industry, and the trustees and funds operating within it, is now similar in many respects to the other APRA-regulated industries. And of course we expect the industry to continue to grow into the future, with increasing assets under management and average fund size, and more complexity in its structures and inter-relationships. Accordingly, APRA’s approach to prudential policy and supervision for superannuation will increasingly mirror our approach for other APRA-regulated industries.

We are significantly lifting our expectations for industry practice, for example in areas such as governance and risk management. We are also expecting strong skills and capabilities, and an increasingly professional approach by those operating within the industry.

APRA’s view is that the vast majority of the industry has made good progress towards meeting the requirements that we have set under the prudential standards. However it is an ongoing journey and we will continually push the industry to enhance its standards of practice, and to maintain its focus on putting members’ interests first.

We have gathered a lot of information on the current state of industry practice through the MySuper authorisation process and our regular engagement with the industry.

(Just as an aside, last week we reached the milestone of 100 authorised MySuper products. We are expecting about 125 in total, of which over 100 are generic, 8 are ERFs and a dozen are tailored large employer products.)

Most of the industry has put in place the policies and frameworks required under APRA’s prudential standards. However, in general, more work is needed to embed and effectively implement these new or revised policies and processes. This applies across a number of areas covered by the prudential framework, such as risk appetite and risk management, investments, insurance, and stress testing.

Over the next 12 to 24 months we will be undertaking thematic reviews focused on key areas covered by the new framework, to assess industry progress on implementation. We will provide feedback based on these reviews to individual funds, and to the industry more broadly, on what we see as better practices and areas where improvement is needed. The aim of doing this is to lift standards of practice across the industry.

We will also be seeking to have more open, frequent and constructive dialogue with boards and senior management than may have been the case in the past. We expect to see a sound level of understanding from all directors, and that they approach their role with an independent, challenging and probing mindset. There should be a robust level of discussion on issues by boards and board committees and evidence of well informed and soundly based decision making.

Boards and committees need to consider whether the information being provided to them is at the right level and focused on the right issues. How are directors satisfying themselves that the policies and processes they have approved are in place and operating effectively? Are they getting the information they need to support sound decision making?

Let me just briefly mention some of the areas on which APRA will be particularly focusing in the next year or so.

Firstly, conflicts of interest.

We have seen conflicts registers of varying quality, and widely differing approaches regarding what is considered to be a ‘relevant’ interest or duty. We expect perceived and potential conflicts, as well as actual conflicts, to be considered in board deliberations. Trustees need to consider whether someone else would think there is the possibility for a conflict, not just whether there is actually a conflict, and to be able to justify not including a relevant duty or interest on their register.

This is particularly a consideration for directors that may have multiple roles, and given some of the complex inter-relationships within the superannuation industry. Increasingly, there are linkages between trustee directors and funds, and the providers of services such as administration, advice and investments. Boards need to consider whether or not these inter-relationships may involve, or be perceived to involve, conflicts. They also need to consider how such relationships are managed and reported. Are arms-length contractual arrangements in place? Is the return and value to members being appropriately considered and reflected, for example, in the fees being paid for the services, in the charges to members, and in the values being placed on any investments in service providers?

Insurance will be another key area of focus for APRA. We are concerned about past pricing levels and the approach to tenders in the group insurance market. This is an issue for both the superannuation and life insurance industries; lessons need to be learned and a different approach taken by both in future. APRA’s prudential standards place a strong emphasis on the role of trustees and insurers in this area. We are seeking to promote a sustainable approach to the provision of insurance to fund members and the development and implementation of sound insurance management frameworks. Trustees need to think carefully about the insurance offered to members and how it is managed. Importantly, insurer selection shouldn’t be primarily price driven and the contractual terms of the arrangement need to be sustainable and appropriate for both parties.

Enhanced data integrity and data management are particularly important in relation to insurance, but it is an issue on which APRA wants to see more focus by trustees across all areas of their operations.

Investment is another area on which APRA will be placing a lot of focus. Clearly, a sound investment strategy is one of the key elements in members’ achieving adequate benefits for their retirement. As you would all be aware, there has been a trend (in the member choice environment) towards funds offering more and more investment options for members to choose from, and also towards use of more complex investment products as part of investment strategies.

There is a balance that needs to be struck between providing flexibility and choice for members, and ensuring that retirement income objectives are met through appropriate diversification and achievement of sustainable returns over long term. The role of the trustee is to develop and implement an appropriate investment strategy for each fund. They should sufficiently understand the investments being used to implement the strategy, and the investment and operational risks involved in those investments and how they are being managed.

Trustees should also consider how many investment options should be offered to members and the constraints that are needed on member’s exercise of investment choices to ensure that appropriate retirement outcomes are achieved. 

There has also been a trend towards more in-house investment management by trustees. This may be entirely appropriate for some trustees, however most are unlikely to have the scale or expertise to effectively undertake in-house investment management. APRA will expect any trustees that decide to move in this direction to take a very considered approach. It is important that they adequately address all of the issues and risks involved, not just focus on potential cost reductions, and ensure that they have all of the necessary skills and processes in place.

In concluding, let me pose a few challenges for the industry to consider.

The first I mentioned earlier, and that is how to manage and respond to large numbers of members and a significant portion of assets moving from the accumulation phase to the post-retirement phase. This will pose risks for both funds and members, and trustees should be thinking now about how to tackle them. What are the implications for their overall strategy, business plan, and investment strategy (particularly the level of liquidity required)? What products are needed and appropriate to assist members manage their transition into the retirement phase and what education and advice do they need? The demographic trends are there to see – what are you doing to respond to them?

The second is about how the superannuation industry communicates to its broader stakeholders, and how members and other stakeholders perceive the industry.

We would all acknowledge the importance of strong and positive communication about the superannuation industry and the critical role it plays in achieving retirement income policy objectives and helping members achieve their retirement goals. There are aspects of the commentary from and about the industry, however, which in my view undermine the positive story that could be told and contributes to negative perceptions about the industry by key stakeholders, particularly fund members.

There is too much focus, for example, on short term investment performance rather than performance over the medium and longer term. And, quite frankly, there is too much unhelpful commentary that seeks to portray some segments of the industry as being better than others. At the end of the day, the industry is all working towards the same goal, namely a financially secure retirement for superannuation fund members. It shouldn’t matter what type of fund is used to achieve that goal; what is important is whether or not the goal is actually being achieved!

The industry has evolved a lot in recent years and there has been significant blurring of what may previously have been strong distinctions between different parts of the industry. Certainly, from APRA’s perspective, there is wide variation between funds in many areas - from the strength of governance processes and management of risks and issues such as conflicts of interest, to investment performance and fees. That variation exists within and across the industry and all of its segments, and better practice is not particular to one industry segment over any other!

APRA will release tomorrow for consultation a discussion paper on our proposed publication of quarterly superannuation statistics. In 2014, we will consult on publication of annual superannuation statistics. 

We are making changes to both the format and content of the data and statistics that we make publicly available, and propose to make much of the data that we collect readily accessible via a database. APRA’s view is that our publicly released statistics should facilitate and encourage analysis of whether the superannuation industry is effectively achieving retirement income policy objectives over the medium to long term. In our view, that is where the focus of industry commentary and analysis should be and I would encourage you all to consider that objective in responding to the consultation package.

In closing, I would challenge each of you to think about the steps you will take, as an industry and individually, to lift standards of practice in key areas such as governance and risk management. What role will you play in commentary on the industry; and what contribution will you will make to supporting and promoting the achievement of adequate retirement outcomes for superannuation fund members over the long term?


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.