APRA Deputy Chair Margaret Cole - Speech to the AFR Super & Wealth Summit 2024

Following the evidence
 

Good morning, 

Thank you AFR for inviting me to join you today. It’s good to be here. 

Today I want to talk about privilege, responsibility and accountability.

Superannuation is a giant, systemically significant, complex, maturing and dare I say “issues-rich” industry, which plays a critical role in the long-term financial wellbeing of this nation’s economy and its people. 

With $3.9 trillion of assets under its stewardship, the super industry has the enormous responsibility and privilege of growing and safeguarding the retirement savings of many millions of Australians. That’s before we even get to the thorny subject of retirement income.

Fund members who are actively engaged with their super will have a good idea of how their money is being invested, and how much they are paying in administration fees and other costs. But engaged or disengaged, few members would know how their money is spent by trustees.

How trustees spend members’ money, what they spend it on, who they spend it with, and the appropriateness of expenditure decisions are regularly the subject of media, political and public discourse and scrutiny – and rightly so.

Any trustee expenditure that does not align with members’ best financial interests, risks compromising member outcomes and eroding retirement incomes.

After observing deficient practices and questionable expenditure in some areas, APRA has growing concerns about trustee spending behaviour. 

A week ago today, we put the superannuation industry on notice. Fund expenditure will be reviewed and scrutinised with intensity. It has become a priority frontier in APRA’s supervision agenda.

Putting the best financial interests of members first

APRA’s decision to double down on fund expenditure will come as no surprise to this industry. 

It’s an area we monitor closely, with a focus that has sharpened since the introduction of the Your Future Your Super reforms in July 2021.

The reforms, rather auspiciously, or inauspiciously, depending on your viewpoint, came into effect on my first day at APRA. They ushered in a raft of changes which have since become well embedded in the industry. They introduced the annual performance test and measures to help stop employees unintentionally having multiple super accounts, with multiple sets of fees and costs to pay.

But central to the reforms was the best financial interests duty which replaced what had previously been the best interests duty. The addition of just one word had significant implications for the industry. The new duty explicitly required trustees to put the financial interests of fund members at the centre of every expenditure decision and all operational decisions as well.

Even for me as a newcomer, the intention of the revamped best financial interests duty was crystal clear: trustees could no longer justify expenditure decisions based on non-financial benefits to members. Trustees’ fiduciary duties were intrinsically linked to members’ best financial interests. 

The duty was brought in after the Royal Commission amid criticism of the scale and extent of discretionary spending by superannuation funds in areas such as advertising, sponsorships and corporate entertainment. 

A thematic review undertaken by APRA around that time suggested that those concerns had merit. The review analysed discretionary spending by 12 trustees on television and sports sponsorship, advertising and payments to external organisations and found examples of trustees failing to measure and assess the benefits to members rigorously. The review also found instances where trustees were unable to demonstrate how additional benefits associated with sponsorships, that had been provided to directors, executives and staff of the fund, resulted in any improved outcomes for members. 

I was optimistic that trustees would accept and honour the unequivocal obligations that BFID placed universally upon them. But I did encounter some cynicism.

I recall meeting with a senior person in a large super fund soon after I joined APRA, and wasting no time in challenging them on the fund’s plans to comply with the new duty. The reply was that it was widely recognised across super that they would need to have a better paper trail. 

But this issue isn’t about the paper trail or all about the process. It’s a substantive issue for all trustees who need to address the question – what is this discretionary expenditure really all about? I want to be clear, we see different practices among trustees and our position is agnostic as to industry model and is evidence-based. Industry, retail and corporate funds are all in our focus. 

But three years down the track we continue to see questionable expenditure decisions and variable compliance with the duty by trustees. Some, indeed, don’t even manage to have a paper trail that stacks up. And a bad decision, well documented, does not make a good decision.

A key enabler to interrogating this issue thoroughly, and to providing fund members with greater visibility of trustee expenditure, is access to detailed data at an industry aggregate and fund level. 

An enabler which we now have.

Shining more light on expenditure

So how do we plan to approach this issue? Well, we plan to follow the evidence.

APRA recently completed a multi-year project to expand the breadth, depth and quality of the superannuation data that it collects. As a 2018 Productivity Commission Report had pointed out, APRA needed more and better data to enhance its understanding and supervision of a rapidly evolving industry. 

Known as Superannuation Data Transformation, the project has significantly enhanced the volume, accuracy and relevance of APRA’s superannuation data collections. 

We now collect more categories of data about the industry, and have greater granularity of the data captured, as well. This has resulted in richer levels of aggregated industry data and very specific fund-level information.

This is not only a good outcome for fund members – it also ensures APRA is meeting the Government’s Statement of Expectations for APRA which includes increasing transparency of performance and expenditure in the superannuation sector. 

APRA’s enhanced product performance data collection, for example, has shone a light on product underperformance in the super industry. APRA has used the enhanced data to inform the legislated annual performance test, APRA’s heatmaps and our new annual Comprehensive Product Performance Package.

Importantly, the data also serves to support our role as a supervision-led regulator, providing valuable insights that our supervision teams can use to hold trustees to account for underperformance.

In the context of expenditure, our expanded data collection represents a significant leap forward in the availability, visibility, granularity and comparability of trustee expenses information. 

Our collection now includes breakdowns of expenses for the whole industry and for each fund, by more detailed categories such as administration, advice, member services, marketing, board director remuneration, and corporate overheads such as travel and entertainment.

We also collect data on the recipients of payments made by each fund to industrial bodies and related parties, in relation to promotion, marketing or sponsorship expenses and any political donations. 

We said from the outset that we would make this information public to deliver greater access and transparency of how trustees spend and invest members money, at both industry aggregate and fund level. This is consistent with our approach to improving transparency across all our regulated entities.

After encountering data quality issues which required us to seek data resubmissions from many funds, we stand ready to publish our inaugural expenses data collection tomorrow.

The release captures data for the 2023 financial year, with publication of the 2024 data soon to follow in early 2025.

The data will show that total industry expenditure was $10.83 billion for the period, with investment-related expenses accounting for more than 33% of spending, advice for 11% and administration and other expenses for 53%.

We urge users to treat the data with a degree of caution because, as many trustees may also wish to point out, this is 2023 data. As we build out the data series over time, with more detailed and accurate data, we will be able to identify patterns and trends in trustee expenditure.Our first expenses data release is a useful baseline from which fund members, trustees and others can compare expenditure across the industry, this year and into the future.

For our supervision teams, the data we now hold for the 2023 and 2024 financial years provides a powerful source of information about the expenditure patterns and behaviours of the entities we regulate – and is enabling our intensified supervision approach to trustee expenditure.

Demonstrating justifiable spending

As we began preparing for the publication of the data, a suggestion was made to promote the release by publishing tables of the top 10 biggest spenders across categories. We decided against it. The main flaw with that idea was that it may be perceived as an exercise in “naming and shaming” trustees for levels and types of expenditure that might well be justified and appropriate. 

The scale of expenditure in a particular category is not necessarily a measure of whether the expenditure is good, bad or appropriate. Some very large items of expenditure may be justifiable as being in the best financial interests of members. Conversely, even relatively small items of expenditure might not be OK.

We also considered whether we should “blacklist” certain types of expenditure, say, for example, advertising or payments to unions. Again, we decided against it. 

If you look across our data collection for expenditure, there are no categories where spending is inherently “bad” or inherently “good”. As Shakespeare’s Hamlet said: “There is nothing either good or bad, but thinking makes it so.”

However, a rather more prosaic expression may come to mind: if it looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck.

The measure of whether expenditure is appropriate under BFID is not whether it passes the “pub test”, although trustees might well have good reason to take public opinion and reputational considerations into account. The measure is whether trustees can demonstrate that the spend is in the best financial interests of its members. Having strong metrics that link spending to member benefit is an effective way of doing this.

We expect trustee boards to demonstrate strong leadership and good governance in their funds’ approach to expenditure. APRA has provided clearer guidelines on our expectations of trustees in the recently revised core prudential standard for superannuation SPS 515 Strategic Planning and Member Outcomes.

The standard and its associated guidance set out expectations for trustees to have robust expenditure management frameworks that include board oversight, alignment to strategic objectives and active monitoring and review.

The updated standard and guidance place the onus on trustees to positively demonstrate the purpose of the expenditure, how the expenditure will be funded and monitored, including how expected outcomes have been delivered, and having the practices and processes in place that would trigger a review of an expenditure decision.

In the guidance, APRA recommends that trustees obtain a yearly attestation from accountable senior executive management that they are taking reasonable steps to the meet expenditure management requirement, and that controls are in place and operating effectively to prevent expenditure that would be unjustifiable in the context of the duty to act in the best financial interests of members. 

Additionally, the Financial Accountability Regime, which takes effect for superannuation in March, specifically reinforces trustees’ accountability for ensuring expenditure decisions are aligned to the best financial interests duty. 

One of the key functions under the regime for super is marketing and advertising defined as oversight design and implementation of the entity’s marketing and advertising strategy and budget. That means there will have to be a person designated in that key function. And we would expect the trustees to exercise appropriate oversight of the performance of key functions.

Accountability means being able to answer for how you allocate spending of member’s monies. It is the trustee’s – not APRA’s – role to determine what is in members’ best financial interests.

Trustee expenditure – an intensified approach 

You may wonder what APRA has been doing with the expenditure data that we have held for some time.

We’ve been following the evidence.

Throughout the year, we have carefully analysed the incoming data, to identify any “outlying” spending – such as that which is unexpectedly large relative to peer funds or a fund’s activities.

Where there has been questionable spending, there has been follow up with trustees. Some in this room may have seen this activity first hand. Where more serious concerns persisted, enforcement action has been pursued. 

Off the back of this initial work, we decided to undertake a sample analysis of a relatively small slice of expenditure. As one of my colleagues puts it, we lifted up one rock and found a significant number of concerns. 

To give you a sense of the potential number of “rocks” that await us, our expenditure collection for the 2023 financial year comprises more than 42,000 lines of data. The data collection for the 2024 financial year, which we have recently received, exceeds 50,000 data entries. 

Given the sheer scale of the collections, our decision to intensify our scrutiny of expenditure does not mean we plan to review every single expenditure item reported.

As outlined in our communication to trustees last week, we will be looking out for expenses where member benefit is not immediately evident or may not be reasonably justified. 

We will be prioritising expenditure where there is potential to improve practices and outcomes across the industry, or where we have market intelligence or where there is significant public interest. 

The areas we will target initially include – but are not limited to – discretionary expenditure categories such as travel, entertainment and conferences.

We will also focus on:   

• relative and absolute size outliers, including consideration of impact to members; and
• particular types of payees and payments where benefit to members is not immediately apparent. 

Where deficiencies are identified, APRA will require that trustees make the necessary improvements, which may include APRA enforcing rectification measures where warranted. In line with our enforcement approach, APRA will typically make enforcement actions public. 

In closing

The expectation for trustees to act in the best financial interests of members, is not new, nor unreasonable, nor an additional burden to their primary responsibilities. It is ingrained in the best financial interests duty, and, more fundamentally, a basic requirement of an industry created to help members build savings for their retirement.  

Broadly speaking, many trustees are compliant with their obligations under BFID on paper. But the paper trail isn’t what this is all about. This isn’t about form over substance. It’s about the substantive responsibility of trustees to put the best financial interests of members first. It’s time to see that translate into action, without exception. There is no room for cynicism in this important task.

Trustees must exercise rigour, caution and care when undertaking what American politician John Randolph of Roanoake, who served under Thomas Jefferson, once called:

That most delicious of all privileges – spending other people’s money.

Thank you