Thematic review of CPS 190 Recovery and Exit Planning readiness in the superannuation industry
To: All RSE Licensees
Registrable superannuation entity (RSE) licensees have a significant responsibility to manage and maintain the safety of the $2,692 billion Australian retirement savings that they collectively manage.1 Ensuring the safety of this money is imperative to members and the Australian financial system. Trustee Boards of these RSE licensees need to be well-prepared for events that may impact the financial viability of their RSE businesses and in doing so continue to prioritise their members’ best financial interests.
Prudential Standard CPS 190 Recovery and Exit Planning (CPS 190) commences on 1 January 2025 for RSE licensees. This standard requires RSE licensees to contemplate events that may threaten their financial viability, develop plans to ensure they are able to successfully navigate these events, and maintain any capabilities needed to deploy these plans.
This letter and Attachment summarise APRA’s key early observations arising from a targeted thematic review of the superannuation industry’s preparedness for CPS 190. This review was conducted over H1 2024 and included 16 RSE licensees that managed approximately 42% of APRA-regulated superannuation fund assets as of 30 June 2023. These 16 RSE licensees were broadly representative of the industry across size, ownership structures, and membership characteristics.
Through this letter, APRA intends to enhance the superannuation industry’s understanding and preparedness for CPS 190 by providing clarification and support for RSE licensees. APRA seeks to drive RSE licensees to consider and develop more robust and effective recovery and exit plans to meet the requirements of CPS 190 within the next six months.
Key observations
While some RSE licensees are well progressed in meeting the minimum requirements of CPS 190, the thematic review identified common areas of weakness.
Improvements are needed across:
- Early warning indicators and trigger levels in the trigger framework should be more relevant to RSE licensees’ operating environment and risk profiles;
- Enhanced preparatory measures should be considered for recovery and exit options, together with an uplift in capability to reduce execution risk; and
- Proactive communication strategies should be implemented to support the effective execution of recovery and exit plans particularly in periods of stress.
The review highlights opportunities for improvement and the immediate need for RSE licensees to further invest in building the structures and capabilities to meet the requirements of CPS 190 by 1 January 2025.
Where to next
The Trustee Boards of RSE licensees are responsible for overseeing recovery and exit planning and should recognise that a well-developed recovery and exit plan will lead to better outcomes for all stakeholders when facing into stress.
As the superannuation industry continues to experience significant growth and therefore impact to members, it is imperative that RSE licensees develop credible recovery and exit plans and ensure an ability to adapt as the environment changes. Robust governance and risk practices are RSE licensees’ first and most significant line of defence against the types of scenarios contemplated in CPS 190.
APRA will progress to supervise to CPS 190 from 1 January 2025, including RSE licensees' adherence to the requirements measured against our Supervision Risk and Intensity (SRI) model.
Please contact your responsible supervisors should you have any questions.
Carmen Beverley-Smith
Executive Director, Superannuation Division
Attachment: Key Observations
This section provides a summary of APRA’s key initial observations from the thematic review, including observed better practices.
APRA conducted a survey of 12 RSE licensees to assess their readiness to comply with CPS 190, focusing on the requirements relating to trigger frameworks and recovery and exit actions. This was further supplemented by an in-depth review of four RSE licensees’ draft recovery and exit plans. These 16 RSE licensees were selected to broadly represent the superannuation industry based on size, ownership structures, and membership characteristics.
The key components of CPS 190 considered and assessed under the thematic review were as follows:
APRA expects that all RSE licensees will consider the key observations and better practice examples in the ongoing development of credible and robust recovery and exit plans (R&E plans).
a. Trigger Framework
Most of the R&E plans and survey responses reviewed included high-level early warning indicators (EWIs) and triggers. There were instances of more advanced escalating trigger responses and initial linkages between the trigger framework and other requirements of CPS 190. However, APRA observed that RSE licensees could benefit from further expansion and refinement of triggers to be more relevant to their operating environment and risk profile.
The following better practice examples were observed from the R&E plans reviewed and reported from the survey responses:
- Clear articulation and alignment of EWIs across the RSE licensee’s business plans, business performance reviews, annual outcome assessments and risk management frameworks, integrated with related RSE-focused contingency plans.
- Incorporation of a wide range of EWIs and triggers that were relevant to the RSE licensee’s specific operating environment and risk profile. These EWIs included both financial and non-financial risks, ranging from liquidity, business, strategic, operational, reputational, regulatory and contagion events.
- Trigger levels that were staggered and justified to inform appropriate response escalation and decision-making processes. More advanced responses highlighted the importance of adaptability of trigger frameworks – that is, triggers should not compel a predetermined “one-size-fits-all” response but rather inform the most suitable actions tailored to the specific situation when triggers are breached.
- The use of flowcharts, tables or “traffic-light” approaches as useful illustrative tools to aid in connecting the trigger framework to response execution.
b. Governance Arrangements
Most of the reviewed R&E plans demonstrated effective and clearly articulated governance arrangements. This allows for regular monitoring, timely reporting, and appropriate escalation to and execution of recovery or exit actions. Where there is interconnectedness between and within group businesses, APRA recommends RSE licensees prepare for potential interdependencies that may require broader stakeholder engagement in their governance arrangements.
The following better practice examples were observed:
- Leveraging existing governance arrangements and processes as much as practical for integration and efficiency. This ensures that the recovery or exit actions adopted by RSE licensees are not considered in isolation and are executed effectively.
- Appropriate formation of a crisis committee and decision-making authority. Decision-makers selected that have a deep understanding of business operations, product or service requirements, and obligations to beneficiaries.
c. Recovery and Exit Actions
A commonly observed area of weakness amongst the 16 RSE licensees was inadequate preparatory measures to streamline execution of limited recovery or exit actions. APRA acknowledges that some RSE licensees may have a limited suite of credible recovery actions for restoring financial resilience due to their ownership structure, business model, and/or access to external capital. It was also observed that a common (and sometimes only) exit action is a successor fund transfer. APRA recommends that RSE licensees further enhance proactive measures and uplift capability to reduce the execution risk of limited recovery or exit actions.
Additionally, some of the reviewed R&E plans and the survey responses included litigation or insurance claims proceeds as potential recovery options. Since these options are contingent, and often time consuming, they cannot be credibly relied upon to achieve timely recovery particularly during the period of stress. Therefore, it is recommended that these options not be included in R&E plans.
The following better practice examples were observed from the R&E plans reviewed and reported from the survey responses:
- A trigger framework that allows for sufficient time (with appropriate buffers) to adjust business operations to address the trigger event(s) or transition to an orderly and solvent exit.
- Comprehensive playbooks that outlined the approach, including detailed instructions, accountabilities, approval levels, indicative timeframes, dependencies, and key considerations in presenting clear execution steps to be followed and monitored by decision-makers in times of stress.
- Preparatory measures for exit options, such as detailing the characteristics or a shortlist of preferred successor funds, improvement in data systems, or preparing documentation to address potential legal, regulatory, or structural requirements to support a timely and effective exit.
- Inclusion of recovery and exit actions that were considered and assessed but excluded in the final R&E plans, which provide decision-makers a clear understanding of why these actions were not deemed credible in times of stress.
d. Communication Strategy
Communication strategies in times of stress are critical to support the effective execution of R&E plans. While most RSE licensees in the review developed communication strategies that identified key stakeholders and were generally tailored to their business operations, more robust responses incorporated measures to enhance operational usability of the strategies, such as the preparation of communication templates.
The following better practice examples were observed:
- Communication strategies that identified key stakeholders for each recovery and exit action as well as indicative timing.
- Communication templates that addressed implications of executing recovery and exit actions. These templates could include significant event notification, staff training and assurance, material service provider response and media release/enquiry.
e. Scenario Analysis (Significant financial institutions only)
Scenario analysis is crucial in assessing the effectiveness of recovery and exit actions. APRA observed a range of approaches for scenario analysis from using existing stress tests, to where appropriate, considering different time dimensions e.g. “fast or slow burn” or combining two or more events. Typical scenarios often observed were severe economic downturns, cyber-attacks, or adverse judicial decisions. However, some of the choices of stress or scenarios were considered less entity-appropriate, had a limited range, or were not sufficiently severe (and plausible) to activate the R&E plan.
The following better practice examples were observed:
- A wide range of severe and plausible stress scenarios that prompted RSE licensees to reassess the calibration of the trigger framework and test the effectiveness of recovery and exit actions.
- The scenario analysis should provide assurance that any barriers or interdependencies are identified, and that the R&E plan remains credible to address a stress event that may threaten viability.
f. Assessment of Recovery Capacity (Significant financial institutions only)
To assess recovery capacity, it is important to regularly monitor and maintain ready access to the RSE licensee's financial reserves, cashflow buffers and/or external capital funding.
As aforementioned, some R&E plans and survey responses included litigation or insurance claims proceeds as potential recovery actions. As these actions cannot be credibly relied upon to achieve timely recovery, these should not be assessed as a plausible source of recovery capacity.
The following better practice examples were observed:
- Inclusion of more than one credible source of financial resources, which can include general reserves. The use of the operational risk financial requirement (ORFR) reserve is limited to material operational risks events.2
- Regular RSE licensee board review, scrutiny, and challenge of recovery capacity, especially post-scenario analysis of material business events.
- Robust analysis and clear assumptions of the amount of capital and liquidity that can be rebuilt during or following a stress event. More advanced responses had conservative and plausible assumptions, including potential dependencies, timing, and sequencing of actions, to support recovery capacity.
Footnotes
1As at March 2024.
2APRA will release updated Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114) and accompanying prudential guide in late 2024 for commencement in 2025.