APRA crackdown on super spending, governance

The  Australian

14 August 2017

Andrew White

The financial watchdog has written to the boards of the nation’s superannuation funds, outlining a range of tough new proposals aimed at lifting governance across the $2.3 trillion sector, including stamping out wasteful spending of members’ retirement savings.

Under the plan — which would become part of the licence condition of the funds — boards may have to demonstrate value for money in sponsorship arrangements, and quasi-political spending by funds has been put into question.

At the same time the new proposals could make it tougher to offer life insurance inside super funds if there is no clear benefit for a fund member.

The Australian Prudential Regulation Authority will also force super funds to bolster strategic objectives and undertake better business planning.

The latest in a series of super fund reforms comes as Industry Funds criticised proposed legislation to improve the accountability and member outcomes of super funds, saying they left out large parts of the industry.

Industry Super Australia said the legislation left the “vast majority” of retail superannuation assets outside a new outcomes test because 83 per cent of that sector’s asset were held outside the low-cost default MySuper fund.

“This is the case notwithstanding that such products on average underperform MySuper products, where the majority of industry fund assets are held,” ISA said in the submission, a copy of which has been obtained by The Australian.

ISA also said new powers for APRA to administer super funds would not apply to bank-owned retail funds, while the power to revoke licences would apply only to MySuper products, rather than all funds.

It also said the reporting requirements for operating expenses had been modelled on “look through” requirements for investment fees that had allowed two-thirds of the funds to disclose “absolutely zero investment fees”.

“The reform package would increase the regulatory burden on industry and other not-for-profit super funds, yet allow bank-owned and other retail funds to resist scrutiny and reform,” ISA said.

“The reform package is an example of both the government’s inability to impose real reform on the big banks, and its determination to shoulder industry and other not-for-profit funds out of their way.

“It is unfathomable why the reform package has disregard for improving member outcomes in the poorest performing parts of the industry administered by bank-owned super funds, while imposing further scrutiny largely on not-for profit funds.

“Members are entitled to expect their super savings are being managed transparently and in their best interests regardless of whether they are a MySuper or Choice member.”

The federal government has a suite of reforms for super, including a review by the Productivity Commission into the default system for super fund selection, and governance reforms requiring industry funds to appoint more independent directors.

In a letter to super boards, APRA deputy chairman Helen Rowell said business planning processes of some funds “are based on unrealistic assumptions and lack adequate rigour, including use of poorly constructed indicators or key performance metrics”.

In addition, APRA plans to force funds to act in the “best interest” of members.

“The superannuation industry is going through a period of significant evolution and it is incumbent on licensees to be focused on meeting the best interests of members through delivering high-quality, value for money member outcomes,” Mrs Rowell said.

“This extends to licensees making decisions about the use of members’ money in a manner that provides appropriate transparency and accountability, and is demonstrably in the best interests of members,” she added.

While she declined to be specific, she said some funds were making payments to related parties which had questionable outcomes for members.

“APRA continues to observe instances of poor governance practices by some RSE licensees in relation to decisions regarding the use of member money and fund expenditure, particularly where payments are made to related parties.

“The combination of poor processes and oversight, and failure to take action when issues are identified, can lead to inappropriate costs being incurred that ultimately negatively affect outcomes for beneficiaries.”

In the letter, she also took aim at “business initiatives” where the link to the delivery of quality, value-for-money outcomes for beneficiaries appears limited or is not adequately demonstrated.

She set out plans that would require super funds to regularly assess whether they have provided quality, value-for-money outcomes for all fund members. “The proposed assessment would include consideration of net investment returns, expenses and costs, insurance, and other benefits and services provided,” the letter said.

She said super funds would have until the middle of next month to provide feedback on the planned prudential measures.

While APRA did not name any funds or provide further details in its letter, The Australian revealed in June the regulator had asked the boards of all 15 industry super fund members of peak body Industry Super Australia to explain how the “fox and henhouse” ad campaign was funded.

The employee-and-union-backed super fund group Industry Super Australia launched the TV ad in March to coincide with a Productivity Commission review that is examining breaking open the default model for super, which favours the industry fund sector.

According to a recent report by Rainmaker Information, Australians are charged about $31 billion in fees for the annual management of their super.