Noose tightens on super funds

The Australian Prudential Regulatory Authority (APRA) yesterday said it was confident that its package of superannuation reforms would pass muster even though the body has not begun formal consultations.

Speaking at the Association of Superannuation Funds of Australia (ASFA) 2017 conference, APRA Deputy Chairman Helen Rowell expanded on proposed changes to the regulatory system that guides trustees.

“We will shortly release a consultation package outlining proposed revisions to the prudential framework, including changes to promote greater transparency, especially around expenditure, and implement member outcomes assessments for all funds,” Ms Rowell said.

Among APRA’s concerns is the large number of funds whose net cash flow ratio has deteriorated over the past three years.

Ms Rowell said another major worry was the fact that most funds have increased their administration and operating expenses since 2014, which she considered was a poor outcome for members.

“Consequently, the changes proposed in our upcoming consultation package are designed to put pressure on poor performers – irrespective of industry segment – to lift their game or, if the needed improvement is not possible within a reasonable timeframe, to gracefully exit the industry.”

An APRA spokesman told YourLifeChoices that it was fair to assume that the bulk of funds were underperforming in regards to costs and cash-flow compared with a few years ago. He added that the timing of when lacklustre funds would be asked to quit the industry would be determined on a case by case basis rather than with a blanket deadline.

Asked how likely it was that dozens of funds could be targeted by the regulator, the spokesman said it depended on the severity of the underperformance.

“We can’t give a checklist that we regard as being worse-case scenarios,” he said.

During the speech, Ms Rowell said the proposed revisions to APRA’s prudential framework were largely separate from the Federal Government’s proposed reforms.

The sector’s efficiency is also under review by the Productivity Commission and it expects to hand down its report next June, which is around the same time that APRA will detail its recommended reforms.

The regulator said it wanted to lift standards across the superannuation industry, which is expected to have $4 trillion under management by 2022.

Currently, the sector accounts for $2.5 trillion of assets. Australians’ nest eggs are managed thus:

  • 2.1 per cent by corporate funds;
  • 22.2 per cent by industry funds;
  • 17.0 per cent by public sector funds;
  • 23.4 per cent by retail funds; and
  • 27.7 per cent by self-managed super funds.

Ms Rowell said it was irrelevant which industry segment managed superannuation “as long as a fund is well-managed and delivering quality, value-for-money outcomes”.

APRA expects there will be mergers among super funds in coming years which will lead to fewer investment options.

“If we look at the composition of the industry five years ago, there were 51 industry funds, 179 retail funds, 40 public sector funds and 64 corporate funds. By comparison, in 2017 there are 40 industry funds, 126 retail funds, 37 public sector funds and 25 corporate funds – a loss of 106  funds overall,” she said.

“This has come about for various reasons, including unsustainable funds closing and transferring their members elsewhere, or funds voluntarily choosing to merge, pool their assets and resources, and hopefully gain the benefits of increased scale.”

Under the reforms, trustees identified as being unable to consistently deliver sound outcomes will be asked to review their operations and perhaps merge or transfer member savings to other funds.

“In some cases, (it) may require trustees to conclude they lack the scale or skills … and exit the industry – after all, the interests of members need to come before directors’ interests when there is a conflict.

 “The proposed directions power before the Parliament would allow APRA to enforce this in cases where trustees failed to see the writing on the wall.

“Our data … show the different challenges faced by smaller funds compared with larger funds, from generally lower returns, to higher operating costs and a general trend towards greater contraction of membership.’’

Ms Rowell also questioned the need for some funds to have an abundance of investment options, saying that this potentially added to administration costs without demonstrating enhanced value for members.

“In particular, might members be better off with a smaller number of options delivering appropriate risk/return outcomes and a reduction in both fees and fund administration costs? I suspect, in many instances, the answer to both questions is yes,” she said.

Opinion: Shonky super trustees don’t deserve ‘grace’

Yesterday’s warning from the Australian Prudential Regulatory Authority (APRA) to sloppy superannuation fund trustees that they would be “pressured” to lift their game is great news.

But can we trust APRA to follow through on its words with effective and speedy action? The signs suggest not.

APRA Deputy Chairman Helen Rowell’s hard-hitting words may end up being just that …  words. She said that “if needed improvement is not possible within a reasonable timeframe, (underperforming funds should) gracefully exit the industry”. Why should they be given the option of “exiting gracefully”? Surely as a watchdog, APRA should order them to reform within a reasonable timeframe, certainly less than 12 months, and if they fail to, the authority should cancel their licence to operate forthwith. That is the only way to ensure members’ savings are protected from being further savaged by bad management.

If, as we suspect, the regulator is probably going to drag its heels, then tens of thousands of retirees will continue to be ripped off indefinitely by trustees who don’t know how, or worse, refuse to run a super business properly.

The admission by APRA yesterday that the bulk of superannuation funds are underperforming in terms of administration costs and cash-flow compared to 2014 was sobering. But its suggestion that it would not impose deadlines on the worst of the worst to reform was extraordinary.

Asked by YourLifeChoices to expand on this point, an APRA spokesman said deadlines were not envisaged. Instead, each shonky fund would be considered on a case-by-case basis.

SuperRatings Chief Executive Kirby Rappell also wondered out loud to YourLifeChoices “for how long will APRA be patient with those who failed to reform before they were asked to exit”.

“I think there are a couple of considerations here. For those funds where underperformance is evident, a timely process to reform or merge is required,” Mr Rappell said. “However, the process to merge a fund takes time and it is imperative that members’ benefits are preserved.

“Accordingly, it will take some time and the quality of the outcome will be paramount. However, it will be important that the funds that need to make change action this quickly.”

SuperRatings publishes information about the best-performing funds regularly. Perhaps it is time for a list of the worst-performing funds to also be published.

YourLifeChoices asked APRA for a list of the funds it considered to be in the sin bin, but without luck. They should be named and shamed. If not, then one has to ask: “Who is being shielded and why is APRA extending them protection?”

APRA is supposed to make sure that superannuation sector trustees do their job properly and not just issue a few sharp words from time to time. Unless the regulator acts swiftly, it will be seen to be on the side of shonky super trustees and not on the side of vulnerable retirees whose savings are being abused.

In conclusion, Mr Rappell could not have put it better: “To be successful into the future, funds need to be doing far more than just business as usual.

“It is the minority of funds who are not viable, but the expectations for all funds is increasing. While many funds have business plans in place, the proof will be in the outcomes that will take time to emerge. Holding all providers to account will ensure a healthy system into the future.”

Do you think your super fund charges excessive costs? Would you mind if your super fund merged with another? Do you trust your fund’s trustees to look after your interests?

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Written by Olga Galacho

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