APRA Executive Director Carmen Beverley-Smith's remarks to the ASFA Conference 2024

Good morning and thank you ASFA for the opportunity to speak here today.

As recent press coverage and Simone Constant’s comments highlight, the superannuation industry is under intense scrutiny. Not just by APRA and ASIC but by media commentators, the community and, more pointedly, your own fund members.

Public expectations for funds to be strong, resilient, member-focused and well run are clearly warranted. 

A robust and prudently managed industry is vital to the financial outcomes of millions of super fund members in retirement and, increasingly, to the strength and stability of the broader financial system.

This is an industry that is growing in size, complexity and economic significance and in which an increasing number of fund members are reaching preservation age.

As APRA Deputy Chair Margaret Cole remarked recently, funds have the privilege, the responsibility and the accountability to safeguard and grow members’ retirement savings and act in the best financial interests of their members.

The way funds are run, how investment and expenditure are governed, how liquidity is managed, how funds perform, and how well members’ needs are understood and met, all have an impact on the financial outcomes of members in retirement.

But APRA continues to see significant room for improvement across many of these areas.

APRA’s priorities for superannuation, as set out in our 2024-25 Corporate Plan, aim to address gaps and weaknesses across superannuation funds’ operations, risk management frameworks and compliance with the best financial interests duty to members. 

With the industry continuing to expand and more Australians heading towards retirement, the need for trustees to address weaknesses and build resilience in their funds is becoming ever more urgent. 

Building resilience

APRA’s commitment to building financial and operational resilience across all our regulated entities is particularly important to the super industry.

With one of the largest superannuation pools in the world, the industry is a leading investor in our local financial markets, and a significant investor offshore as well. 

As a result, the industry is increasingly connected with global and Australian financial systems, and especially our banks. Super funds own more than a quarter of bank shares and a third of short-term bank debt in Australia.

As the super industry becomes a larger and more important part of the financial system, it is essential that we have a strong understanding of what the increased interconnections between superannuation and banking would mean in the event of a system-wide shock. 

For the first time, APRA will conduct a financial system-wide stress test in 2025 with participation by banks and large super funds that have significant holdings in bank debt and equity instruments and in bank deposits.

While the design of the system test is yet to be finalised, it is likely to be somewhat different to the bank and insurance industry stress tests we normally conduct. It will be less about the individual outcomes for participating entities and more about exploring the potential risks that might arise across the system in times of stress. Superannuation will feature in the stress test because we want to better understand the potential impact of a super industry under stress in a system-wide shock scenario, including the sources of risk that might emerge and transmit across the financial system. It is an opportunity for APRA to learn how we can further enhance the strength and resilience of our interconnected system to withstand future shocks. You will hear more from us on this over the coming months.

As well as building financial resilience in the system, APRA will continue to drive improvements in operational resilience at a fund level.

Our new cross-industry operational risk prudential standard CPS 230 comes into force on the first of July next year. Operational resilience frameworks and practices have been relatively under-developed in super in the past, so getting ready for CPS 230 has been a significant undertaking for many in this room. 

The potential risks of cyber and fraud incidents, technology disruptions, and failures by third party providers are very real and, indeed, have become a reality to a number of regulated entities this calendar year. It is also a reality that should you outsource a critical operation, and the service provider fails in their delivery of the service to your members, you will be accountable.   

It is crucial that you have robust operational risk management in place. Being compliant with the new standard won’t protect you against an operational risk event, but it will put you in a strong position to manage the situation appropriately when, not if, things go wrong.

Addressing industry challenges 

Investing members money is a key function of the super industry and fund members rely on trustees to grow and safeguard their retirement savings in a prudent manner. APRA is keenly focused on trustees’ approach to investment governance and how trustees are meeting the updated requirements that came into effect in January last year. 

A survey conducted last November identified continuing issues with unlisted asset valuations. These included a lack of clear revaluation triggers by some trustees, while in other cases the valuations of certain unlisted assets, such as private equity and credit, property and infrastructure, were not occurring on a quarterly basis as per our guidance.

We are now closing out a deep dive review of asset valuation and liquidity management practices for a cross section of large and mid-size trustees with material exposure to unlisted assets, which will provide much deeper insights in these areas. We expect to share those findings soon.

As we announced recently, trustee expenditure is a priority focus area for APRA.

Our publication of fund level expenditure data late last month has provided fund members and other stakeholders with access to detailed information about how members funds are spent across a broad range of categories. The data also gives our supervisors a clearer view of expenditure decisions by trustees. APRA is using the data collected for the 2023 and 2024 financial years to inform our intensified scrutiny of fund expenditure. 

We are initially focusing on:

• discretionary spending categories, such as travel, entertainment and conferences;
• relative and absolute size outliers, including consideration of impact to members; and
• particular types of payees and payments. 

We do not intend to review every dollar spent but where an expenditure is reviewed, you can expect that we will seek information from you that demonstrates the expense was made in the best financial interests of your members, and that you are continuing to monitor that the expenditure is delivering benefits for members. You will need to identify what those member benefits are and evolve the necessary metrics to assess the outcomes for members. 

APRA will continue to hold trustees to account for product performance. With no MySuper products failing the performance test this year, our attention has turned to the choice sector which saw 37 out of 590 trustee directed products failing to meet the test’s benchmarks. This includes monitoring trustees with underperforming choice investment options to ensure they are taking steps to improve or exit these products.

The final priority I want to touch on today is our ongoing commitment, in partnership with ASIC, to drive improved financial outcomes for members in retirement. 

All members are entitled to rely upon their superannuation trustee for assistance as they plan for a sound financial future. The Australian community is not yet sufficiently well-supported in this regard. This is critically important given the significant increase in the number of members expected to enter the retirement phase over the next decade.  

Our joint thematic review published last year identified a lack of urgency by trustees to meet their obligations under the Retirement Income Covenant implement strategies to support members as they transition to the retirement phase of superannuation. The more recent pulse check survey, published in July this year, showed progress had been made but not in the key area of tracking and measuring the success of strategies to improve retirement outcomes for members. Expect APRA and ASIC to keep pushing hard on trustees to improve the support they provide to members in or approaching retirement.

In closing

Superannuation is an industry under the microscope, which will continue to be closely watched as it increases in size and significance. As senior industry leaders, you have the privilege of growing and safeguarding the $2.7 trillion in funds that your members have entrusted into your care. APRA can provide the prudential settings, supervise and enforce but, ultimately, you have accountability for ensuring your funds are strong, resilient, and operating the best financial interests of your members.

Thank you