Deputy Chair Helen Rowell - speech to Investment Magazine's Chair Forum

2020 Vision: Mapping out APRA's superannuation agenda

Good morning and thank you for the opportunity to address you once again.

I usually very much look forward to visiting this part of Australia for this event, however coming to Healesville today has been a somewhat sobering experience in light of the impacts so close by of the devastating bushfire season that we are experiencing. With predictions of worse to come in future years, it is increasingly clear that financial institutions – including superannuation funds – need to consider climate risk, and its actual and potential financial impacts, in their business decisions. But that’s a topic for another day.

My remarks today also relate to preparation for coming challenges, as I outline APRA’s policy and supervisory agenda for superannuation in 2020. Let me say at the outset that I hope everyone was able to refresh and reset – at least a little bit – over the Christmas/New Year break, because it’s going to be another big year for the superannuation industry.

Some of you may be supressing groans at that remark, considering the immensely busy and challenging year we’ve just emerged from, some of which was outlined in our recent Year in Review publication. In APRA’s view, 2019 was one of the most significant 12 month periods for superannuation since the introduction of the MySuper regime and APRA’s prudential framework in 2013/14:

• The Royal Commission put the industry and regulators under the microscope like never before, giving impetus to a range of important reforms designed to lift member outcomes;
• Crucial legislation was passed by the Parliament, boosting APRA’s powers to hold trustees to account and also providing new protections against member accounts being eroded by unnecessary fees and life insurance premiums;
• APRA’s MySuper heatmap delivered a substantial lift to both transparency and accountability, significantly turning up the heat on underperforming funds to urgently lift their game; and
• We kicked off our multi-year program of work to transform the superannuation data that we collect and make available to stakeholders.

In relation to superannuation outcomes, last year saw double digit net investment returns; a reduction in fees for many members¹; a further reduction in the still bewilderingly high number of APRA-regulated funds and products; and the welcome consolidation of more than 700,000 inactive accounts by the Australian Tax Office facilitated by the Protecting Your Super reforms².

The upshot is that last year – while often testing for trustees – was a largely positive one for the stakeholders who matter most: superannuation members.

The challenge for all of us over the coming year is to build on the solid foundations laid down in 2019 to further strengthen a system that, while far from perfect, still delivers sound outcomes for the majority of those who rely on it to secure their financial security in retirement. For APRA, that means rolling out a number of policy initiatives to strengthen the prudential framework, backed by intensive supervision and – where necessary – our “constructively tough” enforcement approach.

APRA’s 2020 vision for superannuation is expansive in its scope and ambition, but its over-arching aim is stated clearly in our latest Corporate Plan: quite simply, improving outcomes for superannuation members.

Kicking off your assessments

One of APRA’s first supervisory priorities for 2020 is to ensure the effective implementation of our new Prudential Standard SPS 515 Strategic Planning and Member Outcomes, which commenced on the 1st of January.

The Business Performance Review (BPR) and legislated outcomes assessment components of SPS 515 present a new and complex undertaking for most trustees. Over time, we expect the depth and sophistication of analysis undertaken will improve as more granular data and consideration of a wider range of member cohorts is incorporated.

We want trustees to be thinking about the medium to long-term, not just the here and now, as they undertake their BPR and outcomes assessment. Do they offer a compelling or unique value proposition for members? Is it sustainable and competitive? If not, then we expect trustees to seriously consider whether their members’ interests would be best served in another fund.

A practical way for trustees to begin the assessment process is to undertake a trial outcomes assessment in 2020, covering a subset of their MySuper and choice products for the 2019/20 financial year. A “test run” will provide valuable insights into the methodology, data and publication issues that may arise in respect of the legislated outcomes assessment required to be completed and published in 2020/21.

For MySuper products, the recently released heatmap for MySuper products should also provide valuable insights for the BPR and outcomes assessment. Trustees with red or amber in one or more areas should start taking action now to lift performance or reduce fees to improve outcomes for member. Don’t wait for APRA to tell you what to do in response to performance issues, or to use our strengthened coercive powers to force action.

Transparency promoting action

On the subject of APRA’s heatmap, you will recall that we contacted trustees of the worst performing products last year and asked for plans outlining actions to address identified weaknesses. We have been pleased to see some actions taken that will immediately have a positive impact for members, such as reduced fees. This is the type of reaction that the heatmap was intended to prompt, and APRA supervisors will continue to assess the adequacy of all trustees’ responses to identified weaknesses throughout 2020.

The next horizon is to bring greater transparency to the choice segment of the market, with APRA’s superannuation data transformation project a key plank to enable this. We would like to see trustees getting on the front foot here, and thinking about how they can improve their own data to facilitate enhanced transparency and robust analysis of performance and outcomes across all of their operations, but particularly for choice products.

From APRA’s perspective, if developing the means and methodology to compare 97 MySuper products was a significant challenge, expanding it to include an estimated 40,000 choice products and options is a potentially Herculean task. Tackling this challenge will be a major, but very important undertaking for APRA this year given the significance of the choice segment of the industry for member outcomes. It’s obviously not feasible or even very useful to assess the performance of all options individually, all the way through to single securities. But the number of products we are dealing with will still be substantial. It’s also fair to predict the final choice heatmap won’t be an Excel spreadsheet with 40,000 rows, so we’ll need to come up with a more workable presentation format! So watch this space…

The combination of SPS 515 and APRA’s heatmaps will provide trustees and APRA with greater clarity on just who is underperforming, and the areas they need to improve. Early signs are that the sector is responding positively to the challenges laid down by APRA and the Royal Commission, but there is much more to do and complacency is not an option. Last year’s legislative reforms mean APRA supervisors now have a more potent arsenal to complement our more assertive supervision and enforcement approach. Where trustees are unable or unwilling to adequately and promptly address areas of underperformance, APRA supervisors will not shy away from taking more forceful steps to compel action – as indicated, for example, by the imposition of license conditions and issuing of directions for three superannuation entities in the last year. As a result, I am confident that the trend of industry consolidation will continue apace in 2020, and the industry’s persistently underperforming tail will continue to shorten.

Building a stronger framework 

Having finalised our post-implementation review of APRA’s superannuation prudential framework last year, moving forward with that review’s recommendations is a key policy focus this year. We got the ball rolling last November with proposed changes to SPS 250 Insurance in Superannuation, and we will shortly push forward with the review of some of the other prudential standards and guidance. This will kick off with consultation on proposed changes to our governance, conflicts and fit and proper standards, and also our investment governance standard and sole purpose test guidance. We will then push on in the second half of the year with proposed enhancements to our prudential standards on risk management, outsourcing and business continuity management.

As we signalled in our letter to industry in March last year, given the increasing size and complexity of the superannuation industry and entities, we will be looking to set a higher bar in a number of areas and seek to align the superannuation standards more closely with APRA’s cross-industry standards where appropriate. So I would encourage you to also look out for the cross-industry policy consultations flagged in our information paper on APRA’s policy priorities for 2020.

Enhancing accountability 

Another important policy area we will be working on this year is the expansion of the Banking Executive Accountability Regime (BEAR) to insurance and superannuation. The design of the new Financial Accountability Regime (FAR) is ultimately a Government decision, however both APRA and the Australian Securities and Investments Commission (ASIC) have been working closely with Treasury on its development, given both agencies’ role in overseeing the new regime.

With the consultation process underway, there’s a limited amount APRA can say about the accountability regime right now, other than confirming that it will apply to all registrable superannuation entity (RSE) licensees. Also, similar to BEAR, the regime will have tiers based on the value of the assets RSE licensees manage, with slightly different requirements. The key difference is that smaller entities won’t have to submit accountability maps or accountability statements to APRA and ASIC.

Regardless of which category you may fall into, all RSE licensees should be preparing now because the extended accountability regime will be on the horizon before you know it. At the bare minimum, a prudent RSE licensee would already be considering its internal accountability structure, and who is responsible for what.

Intensifying supervision

An expansive and ambitious regulatory agenda necessarily requires adequate resources to implement and monitor it, and in that regard APRA will be assisted through the creation in December last year of our new superannuation supervision division.

In addition to the efficiency benefits we expect to gain from concentrating our supervision expertise in one division, we are also boosting our superannuation resourcing. In the space of almost 12 months, the number of APRA employees exclusively or predominantly working on superannuation has risen 34 per cent. The number of frontline supervisors for superannuation has grown by 25 per cent, and is forecast to lift further over the next six months.  But it’s not just about having more dedicated superannuation staff; we are also actively recruiting people with broader and different skills, experiences and perspectives into our supervision support, data analytics and policy areas, and investing in significant upskilling of our workforce. This will support APRA’s aim of enhancing the breadth, depth and intensity of our supervision activity across the superannuation industry (and other APRA-regulated entities).

Wrapping up

APRA’s policy and supervisory agenda for superannuation in 2020 is broad and I urge all of you to read our latest policy and supervision priority information papers.

Lest anyone is feeling daunted by what we have in store, let me finish on an optimistic note.

In the six years since the implementation of APRA’s first prudential framework for superannuation, the industry’s ability to look after its members’ interests has lifted substantially. Standards of governance have lifted. Risks are better identified and managed. Many members are receiving better outcomes.

That hasn’t happened by accident. It is the direct result of the industry being challenged by government, regulators and members, and trustees responding positively to protect and enhance their members’ interests. There is much more to do, but every year more building blocks are put in place to support the delivery of sound member outcomes through our world-class superannuation system.

Growth begins at the edge of your comfort zone. I have no doubt that trustees will feel further discomfort this year, but I am also confident that trustees will rise to that challenge and that ultimately superannuation members will benefit.

Footnotes:

¹ For example around a quarter of all MySuper products reduced their administration fee over the year to September 2019, as well as the introduction of fee caps for low balance accounts. Source: Quarterly MySuper Statistics back series (30 September 2019 edition). https://www.apra.gov.au/quarterly-superannuation-statistics 

² https://ministers.treasury.gov.au/ministers/jane-hume-2019/speeches/address-association-superannuation-funds-australia