APRA Deputy Chair Helen Rowell - Speech to ASFA Conference

Greater expectations: increasing scrutiny of a maturing superannuation industry

As we commence 2021, there is much we could say about 2020. As recently highlighted in our Year in Review, from APRA’s perspective what stands out was the resilience demonstrated by the financial services industry.

And while uncertainty remains, that resilience has allowed APRA to recommence much of the policy and supervision agenda that was curtailed by COVID-19 last year. In the period ahead, we intend to intensify our focus on areas of the superannuation industry that will be familiar to you and where it is clear there is more work to do – governance, underperformance and members’ best interests.

To this end, we will continue to push for improvements, so that member interests are assured, poor performance is rectified and (where needed) a whole of system approach is taken to address issues.

A dynamic landscape

As we consider what the year ahead will bring, it’s important to remember that change is a constant: the superannuation industry in Australia continues to evolve and mature.

We have seen rapid growth and some consolidation in recent years, and we expect this to continue. It was only six years ago that there were no funds with over $100 billion in assets and now we have three, with more to come. Ten years ago the average fund had $2 billion in assets – now it’s $10 billion.

These are significant rates of growth, and as industry assets and member balances have risen, so have the stakes. With growth and maturity comes an expectation – indeed a requirement – of a commensurate level of capability and professionalism for those running what are clearly significant financial services businesses. That means that practices and approaches that may have been acceptable in the past need to evolve and mature to reflect the needs of a larger and much more complex superannuation industry. To the extent there are welcome signs of increased member engagement, you also need to rise to the challenge of more demanding members.

APRA will continue to highlight those funds that are not operating at the expected level and I reiterate the message for those in the industry still lagging behind that, if you’re not up to scratch, you need to get better or get out.

Diversity supports resilience

As we see demonstrated every day across all walks of life, good governance is critical to long term success. So you won’t be surprised to hear that APRA’s focus on improving the quality of governance at superannuation funds will continue in 2021, with reforms to the prudential framework combined with thematic supervisory activity.

Diversity is also important to support the resilience of organisations, and that includes diversity within governance structures. A board that has people with a diverse range of skills and experience is likely to be better placed to deal with the next unexpected challenge – which will almost certainly be different to COVID-19.

When thinking about diversity on boards, it is often simplistically thought of through a gender lens - but diversity goes beyond that. Throughout the pandemic we’ve seen the benefits of diversity play out in a number of boardrooms. Boards that have directors with a wide range of skills, experience and perspectives demonstrated clear advantages: it enabled expansive thinking, deeper insights, better challenge and, ultimately, better decision making.

I have been encouraged by the tangible impact our focus on board skills and capability is having in some quarters. Some Chairs have acknowledged that while they initially undertook board skills-matrix development and assessment from a compliance perspective and with some scepticism, ultimately they found it to be a valuable exercise. It precipitated deeper conversations with their fellow directors about both skill gaps and how to bring new skills to the board – including, in some cases, by having existing directors make way.

Unfortunately, I have also had conversations that are defensive and dismissive of the need to make changes to governance frameworks and uplift board skills and experience, which obviously raises concerns for APRA. A good Chair or director recognises the need for ongoing improvement and is proactively addressing risks before they become issues, rather than reacting and responding after the fact and only when pushed to do so.

APRA and trustee boards should have a shared objective, which is to see continued uplift in governance expertise and capabilities so that the superannuation industry is able to do the job that’s expected of it – operating to ensure that members interests are assured. That objective is enduring, and requires continued focus by all boards.

Supervision and policy priorities

To get a good overview of APRA’s other near-term priorities, I encourage you to read our supervision and policy priorities documents that were recently published. Our superannuation strategy for improving outcomes for superannuation members continues to be underpinned by work in four key areas – strengthening the prudential framework, sharpening supervision, improving data and enhancing transparency.

The key areas of focus for the review of the prudential framework include insurance and investment governance in the first half of 2021, followed by the outsourcing, risk management, governance, conflicts and fit and proper standards in late 2021 and 2022.

These consultations will reflect the findings of our post-implementation review of the prudential framework, review of the cross-industry prudential standards in some of these areas and also our supervision experience in recent years – in particular some of the learnings from 2020. They will also take account of findings from the thematic reviews that are currently in train or planned for the coming 12 to 18 months. These include our reviews of unlisted asset valuation practices, implementation of APRA’s strategic planning and member outcomes standard, expenditure practices and trustee capability/governance practices.

2021 will also see the commencement of the revised superannuation data collection, which will provide a broader and deeper data-set – particularly for choice products. It will significantly enhance APRA’s – and other stakeholders’ - ability to assess key aspects of the superannuation industry such as investment performance, fund expenditure and insurance. This expanded collection is critical for APRA to make further progress on addressing underperforming choice products, and also for implementation of the Government’s Your Future, Your Super reforms.

Implementing the Super Data Transformation project is a substantial initiative for both APRA and the industry and one that needs the immediate focus of trustees. It is important to ensure you are putting in the necessary investment now, to be ready to report when the final reporting standards come into effect in the second half of this year.  We think the data we propose to collect is important for running a high-performing fund in today’s world – if you don’t have it, you might want to ask why.

Measuring performance

In 2021, APRA intends to continue with the publication of the MySuper heatmap and we expect this to remain on a December release cycle. In addition, this year we intend to publish a heatmap assessing choice products. We are also working towards publishing enhanced data on insurance some time in 2022.

APRA will continue to assess performance in key areas and publish the results, quite simply because it works. Identifying underperforming MySuper products was a significant contributor to closure of some MySuper products in 2020, and an estimated $400m annual reduction of fees across a number of others. A positive result, but there remains more work to do to further improve outcomes for members of some MySuper products.

Following the publication of our choice heatmap later this year, we will also be increasing our supervisory efforts to target the choice options and products that the data tells us are not performing well enough.

Needless to say, APRA’s commitment to ensuring that unacceptable performance is rectified is unwavering. For those trustees that have products that are persistently underperforming in any of these areas, they will experience intensified supervisory activity including the expectation the trustee has a plan to rapidly improve outcomes for members or close the product.

Operating with uncertainty

In an uncertain world, one thing I can confidently predict is that the industry, and the environment in which it operates, will continue to change. Trustees will continue to be required to make decisions in an environment characterised by ambiguity and imperfect information. 

The last 12 months have demonstrated that the industry can operate well in a crisis, and does have the ability to adapt when the unexpected happens. It’s important that we all maximise the value of this experience by considering the lessons and making necessary changes so we’re ready for the next collection of challenges.  I firmly believe that the strength of this industry is at its greatest when we work together, and tackle problems by taking a whole of system approach.

Whatever awaits us in 2021, the superannuation industry will continue to grow, mature and consolidate. The industry needs to continue to develop and evolve its capabilities and practices if it is to effectively oversight and manage the multi-billion dollar financial institutions that it increasingly comprises. That includes enhancing diversity through board renewal.

Much has been achieved by the industry, and that should be acknowledged. But so too should the reality that many boards will need to make changes to achieve the standards and performance that APRA requires and the community expects.