Response paper - Strategic planning and member outcomes

Executive summary
 

Since the introduction of prudential requirements and guidance on strategic planning and member outcomes were released by APRA, industry dynamics, legislative settings and APRA’s prudential framework have evolved. In September 2023 APRA released a discussion paper outlining proposed enhancements to the superannuation prudential standards to strengthen strategic and business planning and transfer planning.

The proposed enhancements aimed to:

• ensure expenditure requirements are clearly aligned with the best financial interests duty; 
• support the implementation of the retirement income covenant;
• reflect supervisory observations on areas where the industry needs to lift their approach, with a particular focus on management of financial resources; and
• improve the management of risks to members being transferred across funds.

Following feedback from industry and other stakeholders, APRA is now finalising the updates and changes to Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515), Prudential Practice Guide SPG 515 Strategic and Business Planning (SPG 515) and Prudential Practice Guide SPG 516 Business Performance Review (SPG 516). These enhancements aim to position member outcomes at the front of mind when RSE licensees are satisfying their duty to act in the best financial interests of their members.

Consultation feedback

APRA received 11 submissions in response to the discussion paper and draft standards and guidance. Submissions were generally supportive of the proposed enhancements. However, some submissions identified areas for greater clarity and additional guidance.

Matters raised in submissions included:

• Concerns that the removal of the reference to ‘significant’ in the context of expenditure in SPS 515 would lead to onerous requirements on trustees to justify all expenses to the same degree. APRA’s expectations for a proportionate approach have been clarified in guidance;
   
• Further clarity on APRA’s expectations relating to reviewing retirement incomes strategies including the review of the strategy itself and reviewing the outcomes of the strategy; and
   
• A tension between APRA’s reference to ‘non-financial’ outcomes and the Best Financial Interests Duty (BFID), for which the ultimate determinant is financial outcomes. APRA has added further clarification to the guidance to make clearer the expectations of RSE licensees.

This Response Paper summarises the key substantive feedback from industry and other stakeholders and sets out APRA’s response. In conjunction with this Response Paper, APRA is releasing updated final versions of the standard and guidance, SPS 515 and SPG 515, which now incorporates the draft guidance from SPG 516.

Commencement date

APRA had proposed that SPS 515 would commence on 1 January 2025. Submissions suggested the commencement date should be changed to 1 July 2025 in order to align with the timing of the conventional business planning cycle for most superannuation funds.

APRA acknowledges the merits of this suggestion and has deferred the commencement date of SPS 515 to 1 July 2025. This adjustment will provide industry with an additional six months to implement any changes to meet the standard.

Glossary
 

Key matters raised in submissions
 

Industry submissions received on this consultation highlighted a range of key matters, which are outlined below together with APRA’s response. APRA also considered a number of minor requests for further clarification which are reflected in the amended versions of SPS 515 and SPG 515.

1.1    Expenditure

APRA proposed to remove the reference in SPS 515 to ‘significant’ in relation to expenditure management to ensure that it is clear that all expenditure supports the strategic objectives of the fund and is in the best financial interests of members. Further, APRA has made clear that all expenditure decisions must be supported by sound analysis and meaningful evidence.

Comments received

Some submissions suggested that this would result in the onerous requirement for RSE licensees to justify all expenditure, and all to the same standard.

APRA’s response

A core responsibility of an RSE licensee, and an essential component of its business planning process, is to ensure that fund expenditure is appropriately managed.

The changes to the expenditure management requirements to remove the significance test is an important elevation of RSE licensee obligations to ensure that all expenditure is aligned with the best financial interests duty (BFID).

APRA expects RSE licensees would have an effective and graduated decision-making framework that has appropriate processes for addressing the various types of expenditure, including effective controls and governance delegations. These controls and delegations would be reflective of both the size and/or nature of the expenditure, with well-defined approval thresholds and criteria, and clear requirements for reporting to the Board.

To add further clarity the guidance in SPG 515 has also been amended to make clear APRA’s expectations for expenses to be clearly aligned with BFID. This includes APRA’s view that better practice would include relevant senior executive management attesting to meeting the requirements of SPS 515 consistent with BFID. APRA has also added to the guidance to include non-exhaustive examples of types of expenditure which APRA considers would likely not be justifiable under BFID.

1.2    Retirement income strategy review

APRA proposed that an RSE licensee’s Business Plan should be informed by, amongst others, the annual review of the appropriateness of its retirement income strategy.

Comments received

Submissions sought more clarity regarding this requirement and APRA’s expectations in respect to reviewing both the outcomes of its retirement income strategy and the review of the retirement income strategy itself, including how often these reviews would be required.

APRA’s response

Further changes have been made to clarify requirements relating to the review of the retirement income strategy. An RSE licensee must now ensure that its retirement income strategy is subject to a review of its appropriateness, effectiveness and adequacy at least every three years. SPG 515 sets out the factors that would be expected to inform the review of the retirement income strategy including any changes to the RSE licensee’s business operations as well as changes to the external environment in which the RSE licensee operates.

The outcomes achieved for members, as a result of the retirement income strategy, must be reviewed annually with this requirement embedded in the RSE licensee’s business performance review process.

1.3    Non-financial outcomes

APRA proposed that when articulating member outcomes, an RSE licensee would be expected to incorporate both financial and non-financial outcomes, informed by historical and forward-looking analysis.

Comments received

Submissions highlighted a tension between the reference to ‘non-financial’ outcomes and BFID, for which the ultimate determinant is financial outcomes. Clarification was sought regarding the use of the term ‘non-financial’ in the context of BFID.

APRA’s response

APRA has removed the term ‘non-financial’ from SPG 515 in the context of member outcomes. The expectations that member outcomes are clearly articulated and measurable remains. APRA acknowledges that in some cases financial outcomes flowing to members may be long term in nature, such as those resulting from member engagement and education services. An RSE licensee needs to balance their obligations with the need to provide members with appropriate services to support their ultimate best financial interests. APRA’s guidance has been updated to reflect this position. To support further clarity in relation to expenditure and the potential for non-financial benefits a minor amendment has also been made to SPS 515.

1.4    Sole purpose test

APRA proposed to retire the Superannuation Circular No. III.A.4 - Sole Purpose Test (Circular) and foreshadowed it would not issue new guidance on the sole purpose test.

Comments received

Submissions suggested that guidance should be updated to address the interaction between financial advice fees and the operation of the Sole Purpose Test. It was also noted that given the Government’s commitment to legislation to implement the new model for financial advice, as part of its final response to the Quality of Advice Review, APRA should issue new Sole Purpose Test guidance, including to provide clarity regarding fees paid for financial advice.

APRA’s response

APRA’s perspective remains that the Sole Purpose Test guidance, which was introduced in 2001, has been superseded by industry developments over the last two decades, including the Quality of Advice Review and related developments. APRA’s guidance was originally intended as general guidance designed to assist a subset of RSE licensees which, in 2001, were (by today’s standards) very small and comparatively less knowledgeable and experienced in terms of meeting the requirements of the Sole Purpose Test.

APRA notes proposed law reforms in the Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 (the Bill) include an update to section 99FA of the SIS Act, to provide greater clarity about when and on what basis a trustee can charge a fee for financial product advice from a member’s superannuation interest.

While this Bill has not yet been passed by Parliament, APRA notes that:

• ASIC will, from a legal perspective, have primary regulatory responsibility as regards section 99FA, with APRA and ASIC continuing to collaborate as peer regulators; and
   
• ASIC has publicly confirmed that neither the current law nor proposed reforms require trustees to check all advice documents.

At this stage APRA does not propose to issue new guidance on the sole purpose test.

1.5    Business planning

In addition to the current requirement in SPS 515 that an RSE licensee’s business plan specify the key initiatives that it will undertake to achieve its strategic objectives, including the expected results of each initiative, APRA proposed that the business plan must also specify, at a minimum, the expected cost for each initiative and how it will be funded. SPG 515 provided guidance to an RSE licensee on determining whether an initiative is ‘key’ for the purposes of inclusion in the business plan.

Comments received

Submissions suggested that requiring the expected cost of each initiative, how it will be funded and expected results to be laid out in the business plan would be onerous. It was argued that this level of disclosure may lead RSE licensee’s to limit initiatives in order to reduce the risk associated with the failure to deliver on the stated key initiatives, for example due to reasons of future budget availability.

APRA’s response

APRA has amended SPG 515 to clarify that the level of detail expected to be included in the business plan for key initiatives would be proportionate to the initiative being undertaken. To determine whether an initiative is ‘key’ for the purposes of inclusion in the business plan, APRA expects matters such as the size, complexity, duration and associated budget or expenditure would influence an RSE licensee’s considerations as well as the importance of the initiative and expectations for transparency in relation to the nature of the expenditure.

1.6    Monitoring strategic objectives and business plan

SPS 515 requires monitoring against strategic objectives and the business plan to prompt remedial action. This includes planning for a potential fund transfer using key performance indicators and triggers.  Proposed guidance in SPG 515 set an expectation that these would operate to signal to the RSE licensee, in a timely manner, the need to intensify its response and actions as the situation deteriorates.

Comments received

Submissions suggested that it would not be necessary to have pre-determined triggers for escalating issues with the delivery of specific strategic objectives to the board. Instead, an approach whereby objectives are paired with clear metrics and targets which are regularly monitored may be appropriate. Pre-determined triggers may result in a “set and forget” mentality which may result in too much focus on non-contemporaneous risks at the expense of emerging or unexpected risks.

APRA’s response

SPG 515 has been amended to clarify APRA’s expectation that an effective monitoring process would ‘include’ specified triggers. Also, the triggers would operate to reflect and prompt an ‘appropriate’ escalation in the impact of issues, so that an RSE licensee intensifies its response as a situation deteriorates. The guidance also clarifies that APRA expects the triggers would be periodically reviewed and updated by the RSE licensee in response to changing circumstances.

1.7    MySuper assets transfer plan

SPS 515 includes requirements that apply if APRA notifies an RSE licensee that APRA has cancelled, or may cancel, its MySuper authorisation. SPG 515 provides guidance to support RSE licensees to meet this requirement and develop and implement a MySuper asset transfer when this is necessary.

Comments received

Submissions highlighted the amount of time and work necessary to effect a MySuper asset transfer. The 90-day statutory timeframe is considered by some to be only workable where the RSE licensee would have implemented preparatory steps before it receives the cancellation notice. 

Clarification was also sought on APRA’s guidance to document all necessary steps to demonstrate preparedness to complete the transfer of MySuper product assets within 90 days of cancellation of a MySuper authority. Submissions also asked APRA to clarify the links between the requirements for MySuper assets transfer planning in SPS 515 and recovery and exit planning in Prudential Standard CPS 190 Recovery and Exit Planning.

APRA’s response

The 90-day timeframe relates to the execution of the MySuper asset transfer. To meet this timeframe an RSE licensee would need to have implemented preparatory steps before a cancellation notice is received. 

It would generally be expected that the cancellation of an RSE licensee’s MySuper authorisation by APRA would follow a long period of heightened engagement between APRA and the RSE licensee prior to APRA issuing a cancellation notice. 

APRA has clarified the guidance in SPG 515 to highlight the process that would lead to the issuing of cancellation of a MySuper authorisation. These changes highlight the extended time frame for this process, allowing sufficient time for an impacted RSE licensee to prepare for the implementation of the asset transfer prior to cancellation of its MySuper authorisation (noting the timeline specified under section 29SAB of the SIS Act cannot be amended). APRA has also provided additional guidance on matters to consider during a MySuper assets transfer such as managing service outages, member communication strategy and member data security during transfer.

APRA has also added further guidance to address the interaction between the requirements for transfer planning in SPS 515 and recovery and exit planning in CPS 190 to further support clarity.