Insight

APRA releases prudential reforms to support outcomes for superannuation members

Madeleine Mattera Madeleine Mattera

In December 2018 APRA released a suite of prudential reforms to support its long standing priority of improving member outcomes.

The reforms consist of revisions to the existing standard SPS220 Risk Management and new prudential standards and practice guides, being:

  • SPS515 Strategic Planning and Member Outcomes
  • SPG515 Strategic & Business Planning
  • SPG516 Outcomes Assessment

The package of reforms will be effective 1 January 2020. APRA also issued a response to the industry submissions received during consultation phase.

What has changed since the initial consultation package was released?

  • Relaxation of prescriptive expenditure policy requirements, but funds still need to consider expenditure in the context of business planning
  • Removal of some prescriptive business planning requirements, but business plan initiatives need to be detailed:
    • KPI’s assume increased importance in monitoring and assessing performance of the entire business plan
    • Funds must explicitly consider outcomes being sought for members and results of current and prior outcomes assessment
    • Removal of SPG221 Adequacy of Resources as principles are now enshrined in SPS220
    • Removal of SPG222 Management of Reserves as the key concepts are included in SPG 515 Strategic and Business Planning
    • Change to reporting requirements will be subject to a separate consultation, likely during 2019
    • Changes to opt-out processes proposed in SPS250 Insurance in Superannuation have been deferred until the final form of legislative changes arising from the 2018-19 Federal Budget are known.

Insight

  • Interestingly, the choice of words by APRA falls short of deferring reform until the relevant regulation is passed or effective.
  • APRA highlights the need for funds to produce high-quality value for money superannuation products and services and ensure their business operations are soundly and prudently managed. There remains no definition of “member outcomes” leaving this a complex and judgemental area. Trustees should carefully consider their fund member demographics and invest time to develop well-constructed and relevant outcomes.

What do Superannuation Fund Trustees need to do now?

  • Develop an implementation strategy to ensure the fund is ready to comply with the new requirements and guidance in advance of 1 January 2020
  • Consider and define what outcomes the fund seeks to provide to members:
    • Absolute terms, e.g. Net investment return/ return above CPI, the percentage of members at retirement age likely to exceed ASFA retirement standards, position in quartiles
    • Consider impact of investments, insurance benefits, scale, product features and fund expenditure on outcomes paid to members e.g. Construction on investment options, asset allocation, availability and cost of insurance – notwithstanding the potential impact of opt-in reforms yet to be regulated
    • Consider how to segment membership into cohorts for meaningful outcomes assessment – APRA provide useful examples of this
    • Include legacy and DB products – and consider transition plans for decommissioning such products
    • Identify any changes to operations that would improve outcomes provided to members:
      • A positive obligation to identify and pursue opportunities for improving outcomes, where appropriate
      • Targets and goals should be areas not likely to be very easily achieved based on industry forecasts
  • Ensure the fund has a Management Information System (MIS) to comply with SPS220

Insight

While it is likely a fund will have an MIS, the fund may need to consider whether its MIS adequately facilitates effective risk management as well as monitoring and assessing KPI’s in accordance with SPG515 and SPG516.

  • Review timing of business planning processes and ensure first outcomes assessment is undertaken during or prior to business planning

Insight

Business planning cycles commonly occur over the February to April period each year. Funds may wish to carefully consider the merits of performing an outcome assessment prior to their business planning process.

  • Review content of the business plan to ensure it meets the guidance set out in SPG515, including:
    • Sole purpose test – consider consistency of business objectives of related parties and key service providers
    • Adequacy of resources
    • Contingency plans where strategic objectives unlikely to be achieved – including successor fund transfers
    • Linking risk appetite and MIS with business plan strategic objectives
    • Robust budgets informed by key assumptions such as member demographics

Insight

Budgets for the fund as a whole are distinct from administration or operations budgets

  • Assigning responsibilities to senior managers
  • Monitoring performance via KPI metrics
  • Expenditure policies and procedures including appropriate oversight to ensure expenditure is in members best interests and reflects sound and prudent management

Insight

Areas of expenditure to pay particular consideration to can include:

  • Sponsorships
  • Advertising, marketing, promotion
  • Payments to related entities – particularly where a profit element exists in the payment and it exceeds cost recovery
  • Expenditure outside normal operational requirements
  • Advocacy or political expenditure
  • Extraordinary expenditure (by size or nature)
  • Review reserves including policies and processes for building, utilising and managing excesses / shortfalls, and accounting for reserves:
    • Member equity is an important consideration, including between cohorts and/or generations of members
    • APRA discourages use of resources for “smoothing” investment returns
    • Unallocated monies are not necessarily reserves
  • Develop a methodology plan for updating the annual outcomes assessment, including:
    • Involvement of third parties such as insurers for policy & claims data
    • Involvement of external experts to conduct assessment, assist with data validation /benchmarking 
    • Identification of relevant benchmarks (internal and external) eg.
      • Point in time v longitudinal
      • Benchmark portfolios
      • External source of data
      • Other RSE licensees / peer groups
    • Investment strategy
    • Insured benefits including inappropriate erosion of account balances
    • Services available to members – options, benefits and facilities whether charged to the individual member of spread across all members
    • Fees – attribution of costs to member cohorts, structure of fees, fee capping arrangements and timing of fees charged

Insight

Fees for a traditional “representative member” are highly unlikely to be sufficient for an outcomes assessment.

  • Scale – current and future

Insight

Consider when the benefits of scale are realised. E.g. To members or to a related party in a vertically integrated conglomerate?

  • Operating within fund level not just Super prudent level or as per APRA reporting forms
  • Reference against business plan and projections
  • Assessing initiatives and actions which inform the business plan