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Governance and culture in superannuation

Tuesday 5 April 2016

Helen Rowell - Deputy Chairman - AFR Banking and Wealth Summit, Sydney

It is a pleasure to be able to contribute to the Financial Review’s Banking & Wealth Summit again this year. As was the case when I spoke at this forum last year, there continues to be much on the agenda for the superannuation industry, and also for APRA in relation to its regulation and supervision of the industry.

Today I have been asked to speak on the topic of governance and culture in superannuation. In addressing this topic, I am taking the liberty to look a little more broadly at some of the current areas of industry practice that APRA is, or will be, focusing on over 2016. That is because, at the end of the day, industry practices reflect the governance frameworks, and indeed the culture, within individual entities and across the industry more broadly.

Governance and culture

Having sound governance practices and a good culture is important right across the financial services sector and rightly has received a great deal of attention recently. In superannuation, governance and culture are perhaps even more important as protecting the best interests of fund members is so heavily reliant on trustees doing the right thing. Superannuation doesn’t have the extensive capital and other financial requirements that serve to protect the interests of bank depositors and insurance policyholders. The superannuation prudential framework is therefore much more heavily focused on promoting the right behaviours in the oversight of members’ funds as members bear the cost of mismanagement or poor decision-making on the part of trustees.

Sound governance goes well beyond who is sitting on the board – although that is a very important foundation. Sound governance is also about much more than just investment performance; it is reflected in the quality of each and every decision that trustees make, whether big or small. Sound governance requires rigorous decision-making and oversight processes to be adopted by trustees to ensure that all decisions are well-founded and that the duty to act in the best interests of beneficiaries is front of mind at all times.

In 2016, we will be taking a closer look at director appointment and board performance assessment processes. There are a few areas where we think industry can lift its game in this regard, for example:

  • some boards are larger than would seem optimal, which may hinder effective functioning and decision-making. APRA’s recently revised guidance (for inclusion in Prudential Practice Guide SPG 510 Governance) notes that there are likely to be limited circumstances where a board would need more than 12 directors, and we would expect most boards to have less than that.1 Chart 1 indicates that 58 per cent of boards have less than 8 directors, 39 per cent have between 8 and 12 directors, and 3 per cent of boards have more than 12 directors. These figures exclude alternate directors who often also attend board meetings, further increasing the numbers around the board table. We would encourage those boards at the larger end of the spectrum to consider whether there was scope to reduce the number of directors;
  • some boards either don’t have tenure limits as part of their renewal policy, or don’t apply them in practice. Almost a quarter of superannuation directors have been on their boards for more than 9 years and 15 per cent have been on the board for more than 12 years (Chart 2), when there is growing support for the view (consistent with APRA’s revised guidance) that a person’s ability to exercise independent judgement is hindered the longer they sit on the same board.2 Long tenure does not necessarily compromise a person’s skills and experience, but it does limit the opportunity for fresh perspectives to bring appropriate challenge to board decision making;
  • the processes used to assess skills gaps on boards vary widely but often rely substantially on self-assessment rather than more objective approaches. Further, the approaches used to identify appropriate candidates for the board often do not explicitly consider the skills and capabilities required to fill identified gaps; and
  • board performance assessment processes can also be quite soft, again relying substantially on self-assessment, and follow-up action in response to any such assessments often appears quite limited.

Our thematic review of director appointment and board performance assessment processes is intended to highlight better industry practices as well as areas for further improvement, with a view to helping to move all APRA-regulated superannuation boards towards sound governance practices in these critical areas.

We will also be following up our 2014 review of conflicts management, by reviewing more deeply, for a sample of funds across all industry segments, practices in relation to the management and oversight of different types of related party arrangements.

We have been fortunate that, given the size, complexity and diversity of the industry, examples of really egregious lapses in governance by superannuation trustees have been relatively few (although I’m sure we can all think of some examples). What is perhaps less obvious is the impact, when considered together, that a series of decisions that evidence poor governance practices can have on the outcomes for members over time. Examples of these types of decisions may include arrangements for insurance or administration – particularly with related parties - that are entered into without adequate benchmarking of the terms and conditions against alternative providers; or sponsorship, marketing or other payments for services (such as some of those highlighted by the Trade Union Royal Commission) where the value for money or underlying benefit for members has not been adequately demonstrated and the governance and oversight in relation to those payments is weak. APRA’s thematic review of related party arrangements emphasises the importance of appropriate governance practices for, and ongoing oversight and monitoring of, all related party arrangements to ensure that member best interest obligations are being met. It will assess the extent to which industry practices in this area meet the heightened expectations set out in the prudential standards.

Strategic and business planning

Another area on which APRA will be focusing over 2016 is strategic and business planning.

Today’s superannuation industry is an increasingly important part of the financial services sector and plays a key role in the economy and in meeting retirement income policy objectives. The shape and nature of the industry is also changing, particularly as a larger proportion of fund members move into the retirement phase. This has a wide range of implications for funds, and it is therefore important that superannuation boards are giving due care and attention to the different risks and issues that this demographic change raises. In this context, superannuation boards should be:

  • setting strategic direction and developing robust business plans; and
  • ensuring appropriate benchmarking, monitoring and review of their operations, services and performance in all areas.

Some superannuation boards have developed rigorous and proactive strategic and business planning processes, recognising the need to adapt, respond and remain relevant in a rapidly changing environment. In some instances, however, strategic and business planning appears to have more focus on ensuring compliance with legislative and prudential requirements than addressing core strategic and operational challenges. In other cases, strategic and business planning does not seem to be supported by adequate forward-looking analysis. Further, when planning frameworks are weak, monitoring performance against plans and instigating corrective actions when targets are not met are also likely to be lacking. Weak planning and monitoring processes are unlikely to serve boards – or more importantly their members - well.

Let me briefly touch on a few of the drivers that need to be considered by superannuation boards in setting their strategy and undertaking their business planning.

At an industry level, net contribution flows remain positive, with total contributions exceeding benefit payments and net benefit transfers (Chart 3). However, APRA data indicates that the net outflow ratio (i.e. the ratio of cash outflows to cash inflows) for the industry is slowly trending upwards. And almost half of the industry – or 45 per cent of APRA-regulated funds - had a net outflow ratio exceeding 100 per cent for their year of income ending June 2015 (Chart 4). APRA data also indicates that more than 20 per cent of funds experienced a decline in net assets over that period. Being cash flow negative (i.e. with cash outflows exceeding cash inflows) or having declining net assets has potentially significant implications for the future strategy and viability of any fund. This is a critical issue that is probably not getting the attention that it should across the industry as a whole.

Part of the driver for the upward trend in cash outflows is the continued increase in total benefit payments (Chart 5). There is also a clear (albeit relatively slow) trend towards pension benefit payments and away from lump sum benefit payments. These trends can be expected to continue as the age profile of members in many funds also increases and hence an increasing proportion of members reach the post-retirement phase. Chart 6 shows that although the number of member accounts for those aged 50 and over is only 29 per cent of the total number of member accounts (compared to 22 per cent ten years ago), these member accounts represent 63 per cent of total members’ benefits (compared to 56 per cent a decade ago). The Government has commenced discussions with industry on implementation of comprehensive income products in retirement, as recommended by the Financial System Inquiry (FSI). Superannuation boards should, however, already be considering the retirement products and options to be provided to their members as, regardless of any Government initiatives, underlying demographic trends mean that these will need to become an increasingly important part of their business models into the future.

Superannuation entities are now required to report to APRA more information about their membership, much of which is made available in our publications at both an industry and fund level. Boards should be actively reviewing in-depth analysis of this information as part of their planning and monitoring, to obtain a better understanding of the nature of their membership and to recognise the implications for their overall strategy and business operations, product design, investment strategy and services provided to members.

Another aspect of the industry landscape that is relevant to strategy and business planning is the increase over time in the level of industry concentration (Chart 7) and fund size (Chart 8). Notwithstanding that superannuation is the least concentrated of the industry sectors that APRA supervises, it is continuing to consolidate in a manner similar to the rest of the financial system. The 20 largest funds represent 64 per cent of APRA-regulated industry assets at 30 June 2015 compared to 44 per cent in 2005. These largest 20 funds ranged in size from $18 to $95 billion at 30 June 2015. However, a substantial tail of relatively small funds remains, with the median fund size being around $700 million at 30 June 2015, and many funds are much smaller than that.

Some small funds are able to operate efficiently and effectively and have sound strategies and niche positioning that should position them well for the future. However, it is important that boards of all funds – large and small - review their strategy in the context of emerging industry trends, including those that I have touched on today, to ensure that they will be able to meet their member best interest obligations into the future (even if that means considering a merger or transfer to another fund).


Another important aspect of governance for superannuation boards is setting an appropriate investment strategy. The quality of decision-making by boards in this area is absolutely critical to achieving adequate retirement outcomes for the members of the funds under their oversight. Investment strategies need to be appropriate to the specific characteristics of the particular fund, product or investment option. This requires detailed consideration of a range of factors such as the membership profile, desired return target and risk level and liquidity needs and strategies would therefore be expected to vary across funds with different attributes. In reviewing the investment data that is reported to APRA, however, we don’t always observe the patterns that we expect to see.

For example, Chart 9 shows the spread of the benchmark asset allocation to equity and property for MySuper products with a single diversified investment strategy and differing return targets. There is some evidence of an upward trend – i.e. an increasing allocation to equity and property assets as the desired return target increases – as would be expected. The chart also shows, however, that there is quite a spread of allocation to equities and property for the same level of return target, and also the same level of allocation for products with quite a wide range of return targets.

Chart 10 shows the allocation to cash and fixed income assets for MySuper products with different age profiles, based on the proportion of benefits for members aged 50 and over. Here, the evidence of a decreasing trend in allocation to more defensive assets (cash and fixed income) for MySuper products with a higher proportion of older members is not what we would expect. And again, there is quite wide variation in the level of allocation to these types of assets for products with a somewhat similar age profile.

While there may be good reasons for these variations, we would expect superannuation boards – particularly those that look to be outliers on the charts - to satisfy themselves that their allocations are appropriate to their circumstances. In particular, they need to be satisfied that the investment strategy being adopted in practice is consistent with the characteristics of the particular fund or product, and also with the disclosed return target and risk level i.e. that the fund investments are “true to label”.

The illustrations in the charts that I have used today on investment allocation relate to MySuper, but my observations are equally relevant across other products and investment options and go to the heart of the trustee covenants in relation to investment in the SIS legislation.3 APRA’s view is that, in setting investment strategy and assessing investment performance, the superannuation industry continues to place too much focus on short-term peer comparisons. We would encourage boards to ensure they are applying adequate critical thinking in setting their investment strategy. This includes giving due consideration to the strategy that is most appropriate in the context of the outcome benchmarks for the particular fund, such as the absolute (or real) return target that is needed to meet retirement income needs, and to the need to effectively manage downside risk i.e. mitigating the risk of sustained capital losses or negative returns.

Fees, costs and transparency

There has been significant focus on the efficiency of the superannuation industry in recent years, in particular by the FSI. This will continue as the Productivity Commission undertakes the review commissioned by the Government in response to the FSI. In that context, it is timely to make some observations on industry practices in relation to fees, costs and transparency.

The Stronger Super reforms placed considerable emphasis on enhanced transparency and disclosure for the superannuation industry. While the industry has made significant efforts to meet heightened reporting and disclosure requirements, there remains room for improvement in the accessibility, consistency and reliability of the information that is reported to APRA and disclosed to fund members (and other stakeholders). One area in particular that has proved problematic is the reporting and disclosure of fees and costs.

At face value, the data that is reported to APRA suggests that there is scope for industry fees and costs to come down. However, to better understand the range and nature of fees and costs, and hence the scope for any such reductions, there needs to be far greater transparency about the underlying costs associated with running a superannuation fund, as well as improvements in the consistency and comparability of the information that is being reported or disclosed.

These two charts provide a snapshot of the information on actual expenses that has been reported to APRA under Reporting Standard SRS 330.0 Statement of Financial Performance. The range of reported expenses is quite wide (particularly for reported operating expenses – Chart 11). We would observe, however, that the quality of the underlying expense data reported to APRA is quite variable. Of particular note on Chart 12, for example, is that 28 per cent of funds reported zero investment expenses for their year of income in the year to June 2015. This likely reflects that investment costs are not being separately identified and reported as intended – they may be included in other costs or not reported where, for example, they have been netted off investment returns. This is just one example of the reporting issues that raise questions about the underlying accuracy (or otherwise) of the reporting of fees and costs – something that is very difficult for APRA to assess based on the information that is reported to us.

Prior to our most recent release of the annual publications, APRA raised 1400 queries on the information submitted (not all of which related to fees and costs), which led to over 500 data re-submissions. This suggests that there is some way to go before we can be comfortable that credible and reliable information is available to meet the enhanced transparency and disclosure objective of the Stronger Super reforms. Trustees need to satisfy themselves that appropriate processes are in place to ensure that the information that is being reported or disclosed in relation to their funds is accurate and reliable. They should also be seeking to ensure that the spirit and intent – and not just the letter - of the enhanced transparency requirements are being met.


I have not been able to touch on all of the industry issues that are on APRA’s radar in the time available this morning, but hopefully I have given you insights into some of the areas on which APRA will be focusing over 2016.

As I indicated in my opening comments, all of the issues that I have touched on relate to issues of governance and culture. In short, how can we and other industry stakeholders gain greater confidence that the best interests of members is at the forefront of every decision that trustees make?

Governance and culture go hand in hand, and need to be considered in all areas of trustee operations, not just the areas I have highlighted today. It is important for the reputation and standing of the superannuation industry that each and every participant contributes to enhancing industry governance and culture. This requires an unwavering commitment to delivering enhanced retirement incomes for fund members - particularly by trustees. APRA’s role is to encourage the industry to achieve this through our standards, guidance and supervision; where needed we will push strongly for and if necessary impose higher standards of practice. However as Wayne Byres noted in his speech earlier today, it is the industry that needs lead the running when it comes to culture – and for the superannuation industry it is trustees that need to be at the forefront.

So I look forward to a year of significant progress by the industry, and hopefully to being able to look back at next year’s forum to see just how far the industry has come on its governance and culture journey.



  1. ‘Letter to RSE licensees – Outcomes of consultation – Governance arrangements for RSE licensees’ (18 December 2015), available on the APRA website
  2. For example, ‘CalPERS Revises Governance Policy, Adopts 12 Years as Threshold for Director Independence on Corporate Boards’, 14 March 2016,
  3. Refer to ss. 29VN and 52(6) of the Superannuation Industry (Supervision) Act 1993.

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.