Opening the door to greater transparency in superannuation
Good afternoon everyone. It is a pleasure to be speaking at this important industry conference, at what is a pivotal point for the industry, and the financial services sector as a whole. All industry stakeholders are – or should be – reflecting on what they and other industry participants need to do differently to address the many issues and recommendations that have emerged from the Royal Commission, and other inquiries undertaken over the last year or so. That includes all of you in this room – there is no room for complacency by any industry participant.
There are many themes I could talk about today, but what I want to focus on is enhancing transparency to promote better understanding for all stakeholders on how the industry (and its regulators) are performing.
A consistent gripe about superannuation over many years has been Australians’ disengagement with what is often the largest or second largest investment of their lives. That has changed somewhat over the past year. Trustees have faced an unprecedented level of scrutiny that has prompted thousands of members to investigate and make changes to their superannuation arrangements, with a view to gaining better outcomes. That is undoubtedly a good thing, but a short term spotlight on the industry is not likely to result in sustained engagement by superannuation members.
The key to engaging members over the long term, helping them to make informed choices, and ensuring all stakeholders can draw meaningful conclusions on industry performance, is accessible and understandable data. But – with almost 200 funds and 40,000 options spread across different industry sectors – acquiring the information and presenting it in a way that balances accuracy and simplicity is extremely challenging. The waters are further muddied by a tendency for vested interests to skew the data to paint their sector, fund or product in the most flattering light.
Consequently, much of the commentary around superannuation contains generalisations and misrepresentations that don’t serve the public well. For example, it is true that, on average, the industry fund sector outperforms the retail sector. That statement doesn’t help members, however, since there is no average industry (or retail) fund. Rather, there are many different funds in each sector of the industry, with widely varying performances. What’s needed is to go beyond sweeping generalisations by developing greater credibility, consistency and clarity of performance information – not only at an industry or sector-wide level, but at an individual fund and product level.
Regulators have also been in the spotlight. The key message has been the desirability of stronger, timely action to address prudential concerns or breaches of the law by trustees and their directors as well as much more transparency about the steps APRA is taking to tackle this. As part of our ongoing strategy to weed out underperforming funds, products and options, APRA plans to usher in a new era of superannuation transparency: providing better information on trustee and product performance, and increased visibility of APRA’s actions to address underperformance. Trustees that fail to live up to their obligations will have very few places to hide.
The Royal Commission
Before saying more about what steps we will take to promote transparency, some brief comments on the Royal Commission report and recommendations are appropriate.
It’s important to firstly note that, in relation to APRA’s primary role as prudential regulator, the Commission’s report has not questioned the safety and stability of the system or the superannuation sector. Further, no material change has been proposed to APRA’s role and responsibilities in relation to superannuation. The recommended strengthening of the Australian Securities and Investments Commission’s (ASIC’s) power to regulate conduct matters in superannuation is a welcome and important step – indeed, we advocated this in our submissions to the Royal Commission. I look forward to further strengthening and deepening the cooperative and collaborative relationship between our two agencies – particularly as it relates to regulation and supervision of the superannuation sector.
Commissioner Hayne identified areas where APRA must clearly do better – especially in relation to ensuring trustees are held to account for failing to meet their obligations to members. As the APRA Member with primary responsibility for superannuation, I am committed to driving our response to these issues. To that end, you can expect to see a more assertive APRA that pushes harder for trustees to fix problems more quickly, is less patient with inadequate responses or inaction, and more willing to make an example of uncooperative trustees and directors.
Putting members first
As the Productivity Commission stated in its recent report, the superannuation system continues to serve the majority of members well. The industry as a whole has delivered average returns over the past 10 years of 5.8 per cent. And even among the bottom quartile of MySuper products, net returns over the five years to December 2018 were between 3.3 and 5.3 per cent. Nevertheless, APRA will maintain its focus on cleaning up the unsustainable and underperforming tail of the industry, as well as continuing to lift standards of practice more broadly.
It is important to remember that compulsory superannuation has only existed since 1993, only became subject to APRA supervision in 1998, and it wasn’t until 2013 that APRA could create prudential standards. Despite being responsible for managing $1.7 trillion , the APRA-regulated superannuation industry still lacks the maturity in its governance and risk management practices that is needed of modern financial institutions. Even five years ago, some trustees struggled with the basics of running a business, such as record-keeping, managing conflicts of interest and ensuring directors were suitably qualified. APRA’s focus on addressing these deficiencies has been squarely aimed at benefiting members. After all, if a trustee can’t manage itself, how can it look after billions of dollars of members’ money? With these fundamentals now largely in place, APRA has expanded its focus to member outcomes.
The number of superannuation funds has more than halved over the past decade, from 466 in 2008 to 198 today. A major driver of that consolidation has been the introduction of APRA’s prudential framework for superannuation in 2013 and our ongoing efforts to keep lifting the bar that trustees need to clear, so that all trustees are better positioned to deliver quality outcomes for members. Over this period, many trustees have come to accept that they cannot meet these higher expectations and have passed the trusteeship of their funds over to those better equipped to do so. But there is more to be done.
In the next week or so, I will send a letter to all registrable superannuation entity (RSE) licensees laying out our areas of focus for superannuation. It will set out areas where we expect trustees to review and, where needed, improve their performance and operations, and where APRA will focus its attention – based on our own experience in supervising the industry, but also reflecting issues highlighted by both the Royal Commission and Productivity Commission. Our expectations are wide-ranging – from lifting board capability, to developing a stronger fiduciary culture, to adequately addressing conflicts of interest. But they can be distilled to one thing: making sure trustees are putting their members’ interests first.
Creating clarity and enhancing transparency
In addition to taking a more assertive supervisory stance, APRA will deliver greater transparency; on the industry’s operations, performance and delivery of outcomes, and also on the actions we are taking to lift behaviour and practices across the industry and within individual trustees. Although there are good reasons why we can’t and don’t disclose every supervisory action we take, the Royal Commission has made clear that it’s not enough for us to only act behind the scenes; the public needs to have greater confidence that action is being taken to hold trustees and directors to account and to address underperformance and poor outcomes. We will therefore start providing, to the extent feasible, more information on the steps we are taking to ensure trustees address weaknesses and rectify breaches, including instances of formal enforcement action.
Central to delivering greater transparency is the enhancement of our superannuation data collection. Insufficient, inconsistent and inaccurate data currently hampers the ability of APRA supervisors to fully understand what is happening in the entities they are responsible for. It also hinders members who are trying to make informed decisions about which fund will deliver them the outcomes they are seeking and limits the ability of all stakeholders to really understand how the industry operates and performs.
For this reason, and as we have previously signalled, we will be undertaking a major review of the superannuation data reporting regime. This review aims to provide greater coverage, enhanced consistency and better quality data through clarifying and revising definitions, and increased granularity in some areas, such as expenses. With our MySuper data collection now in reasonably good shape, we will focus on upgrading visibility across the choice segment of the market, where the largest data gaps remain. We acknowledge that sourcing and delivering this additional data might present a regulatory burden for trustees, but it is essential to restore confidence in the industry and for APRA to do its job. Where obstacles arise, we expect industry to help us find solutions rather than just telling us that something can’t be done.
Our superannuation analysts will harness data-driven insights to identify underperforming funds, products and options, and that “outlier” list will be regularly reviewed and updated. The trustees of these funds will be targeted with intensified supervision, with APRA seeking prompt action to address areas of weakness or concern. If trustees are unable or unwilling to respond appropriately, we will be urging them to seriously consider whether restructuring or exiting the industry is in their members’ best interests.
It is a pity that the Members Outcome Bill – which provides an expanded directions power and the ability to take civil penalty action for breaches of obligations to members – has not yet passed the Parliament, as our ability to compel action is more limited than we would like. But we will be using whatever tools and powers we have to get action. Of the 28 outlier funds we identified 18 months ago, only three have still not responded adequately – and these will soon be resolved. For now, we don’t intend to disclose which funds make this outlier list, recognising that being effectively labelled among the “worst-in-show” is likely to hurt the financial interests of members. But I do stress ”for now” – we are actively developing ways to provide greater transparency around the outcomes individual funds and products are delivering their members, thereby making performance clearer to all.
We will continue conducting “deep dive” reviews across the industry on particular areas of prudential concern. Outsourcing – in particular to related parties – will be an early target, making use of external expert resources to enable us to cover more ground and probe more deeply and effectively. We will also consider how we can publish more about the findings of these reviews, potentially including details of the specific superannuation entities and the assessment of their practices in the areas covered. This marks a step change in APRA’s approach, consistent with our commitment to enhanced transparency.
From the start of next year, all superannuation trustees will start undertaking their member outcomes assessments as required by our new prudential standard SPS 515. In parallel, we expect to begin making public our view of fund performance at a more granular level – our heat maps, if you like. This will include a set of performance metrics at an individual fund and product level (where reliable data is available) across four key quantitative areas: investment performance; fees and costs; insurance; and scale and sustainability. Initially this will just be for MySuper products, but will be broadened to include choice products as our data collection in this area expands and we have confidence in its reliability.
Our challenge is to collect and present superannuation data in a way that can be understood by a broad audience and yet also allows for meaningful comparisons between funds and products. MySuper products are fairly similar: to use the fruit metaphor so beloved by the superannuation industry, you might be comparing a Royal Gala with a Pink Lady, but they’re both apples. That’s not the case with choice products, which are more varied, more complex, and where investment outcomes are often strongly influenced by members’ own decisions. Seeking to directly compare them can be like comparing an apple with an orange, or something that just happens to be orange, like a carrot or a goldfish. In an environment where data is frequently wielded like a weapon and accuracy too often a casualty, we are mindful of not collecting and publishing data that lends itself to being misrepresented, or inappropriately distorts industry behaviour. A challenge indeed, but one which we are certain can be effectively tackled!
Time for action
Let me wrap up.
Australia’s superannuation system is sound and stable. The fact that APRA’s primary concern is underperforming funds – rather than the risk of a fund collapsing and wiping out members’ savings – is something we shouldn’t take for granted. But as the Royal Commission and Productivity Commission have made clear, there is much room for improvement across the industry.
As should also be clear from the ongoing battle over proposed changes to superannuation legislation, reforming the system is not easy. But with Australians predicted to have $3 trillion (in today’s dollars) invested in APRA-regulated superannuation funds by 2030, this is not a challenge we can afford to shirk. Legislation giving APRA a broader directions power for superannuation, and the power to pursue civil penalties against trustees and directors for breaching their obligations to members, was first introduced to Parliament in September 2017. APRA Chair Wayne Byres recently described this legislation as a “game changer”. Although we are disappointed it has still not been passed by the Parliament, we certainly expect it will be, given both sides of politics have strongly asserted their commitment to improving member outcomes. And when the game does change, APRA is ready to make use of its new powers: they are essential to making sure we are fully equipped to weed out underperformance wherever it may be.
But trustee boards should not wait for legislative changes or for other recommendations of the Royal Commission to be implemented to review and improve their practices. They can start by getting to work on implementing the member outcomes and strategic planning prudential standards that APRA released late last year, and considering what they need to do in the areas highlighted in the letter they will receive from me shortly.
Trustees’ fundamental consideration is a simple one: am I acting in the best interests of my members at all times? As APRA opens the door to more transparency on superannuation performance and member outcomes, the answer to that question will become increasingly clear to everyone.
 APRA’s Quarterly Superannuation Performance Statistics, December 2018 edition.
 Superannuation Market Projections 2018 report, Rice Warner.
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.