Super funds have just one year to justify their existence under tough new rules just released by the Australian Prudential Regulation Authority (APRA).
APRA will be using these new rules to target underperforming funds and drive increased fund mergers.
APRA is not waiting on the final reports of the Productivity Commission or the Financial Services Royal Commission, and these requirements do not require legislation. Amongst the many pieces of superannuation legislation before Parliament are Bill that would give APRA more powers with which to drive these requirements, but they are not absolutely required for these new rules..
The new requirements compel super funds to annually benchmark and evaluate the performance of their MySuper, choice, legacy and defined benefit products in delivering sound, value-for-money outcomes to all members. The new ‘outcomes assessment’ sets a higher bar for super funds that must be reflected in their strategic and business planning.
Unlike some other changes (such as the new requirements for reporting to the ATO), these are not requirements that can be handed over to third party providers to fulfil. These changes are fairly and squarely the responsibility of super fund boards and their trustee offices.
APRA has released a new Prudential Standard 515 on Strategy Planning and Member Outcomes and supported this with Prudential Practice Guide SPG 516 Outcomes Assessment. The prudential standard sets out outcomes and key requirements, while the PPG is about designing, undertaking and using the outcomes assessment.
APRA is not telling funds the metrics they need to measure outcomes, although they have given these examples of what could be used:
- net investment returns, on an absolute basis, as well as relative to relevant benchmarks and risk/return targets over different time periods (e.g. one year, 3 years, 5 years and 10 years);
- fee levels, including costs per member;
- administration and operating expenses as a percentage of average net assets; and
- level and cost of insurance cover (by insurance type), including measures of account erosion such as the premium as a percentage of salary.
Except for insurance, APRA has not suggested using broader industry benchmarks. It is likely super funds will look for the development of new benchmarks and will be involved in an iterative process, talking to other funds, industry associations, regulators and service providers about the best way forward.
They have characterised the implementation of the assessment “as a process of continual improvement” that will “evolve over time”.
When other requirements have been introduced – such as when MySuper was developed – APRA have said they don’t want a ‘cookie-cutter’ approach. However, it’s not completely clear what approach they do expect and what minimum outcomes are required.
APRA have said that funds “are expected to set targets or goals that are not already being achieved or are not likely to be very easily achieved based on existing forecasts.” This will be a challenging for both high performing funds and those that already need to improve their outcomes.
These new requirements will be given the highest priority by super funds even through the details will take time to become clearer. As funds develop their outcomes assessment models and these become known throughout industry and APRA gives their preliminary evaluation of different approaches, funds will need to be adaptable in their responses.
IQ Group works with very many super funds and service providers, and is developing tools to help funds respond quickly, comprehensively, and with agility to this exciting new environment in which members interests are paramount.
In the new year, IQ Group will provide our clients a framework for action to address the critical need for reporting and analysis. To ensure your fund has the tools to respond quickly and comprehensively, contact us at firstname.lastname@example.org.