The regulators are stirring

Adam Gee writes that it seems clear that superannuation funds are now entering a new era of regulatory oversight.

On 30 June, the Australian Securities and Investments Commission (ASIC) released a significant report, ‘REP 529 Member experience of superannuation’, which requires trustees to place greater focus on the manner in which they disclose critical fund information to their members.

This was followed late last month by Minister for Revenue and Financial Services, Kelly O’Dwyer’s announcement of draft legislation aimed at improving member outcomes, which will incorporate significant new powers for the Australian Prudential Regulation Authority (APRA).

The intended move from the existing ‘scale test’ to demonstrate a fund’s ongoing viability to an ‘outcomes test’ will place far greater onus on superannuation trustees to demonstrate that they continue to act in the best interests of their members.

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Specifically, the outcomes test requires trustees to assess their performance against a range of metrics outlined within the draft bill, whereas in the past, there was little guidance as to how trustees could determine their ongoing achievement of scale, which was supposed to be used as evidence of a fund’s financial viability.

Some funds which were relatively ‘creative’ in justifying scale will find the specificity of the new outcomes test a challenge, to say the least, with the regulator looking on.

Whilst more detail is still required in terms of measurement periods and benchmarking approaches, the new guidance should serve as a wake-up call for some potentially sub-scale funds to consider their ongoing sustainability, particularly in light of clarified obligations to act in the best interests of their members.

KPMG would have liked to see a greater focus on operating cost metrics for superannuation funds as a key tenet of the new outcomes test. We continue to believe that a fund’s capacity to continue to invest in, and develop, new products and services for their members remains a key determinant of a fund’s scale and the outcomes a fund can deliver to its members.

We also note that the proposed legislation provides material additional powers to APRA to intervene at any earlier stage where it has prudential concerns surrounding the actions of a trustee. This is substantially different to the powers APRA has in relation to the superannuation industry and in line with their powers in relation to the banking and insurance industry. Either way, this should once again put trustees on notice and suggests that APRA will be far more intrusive in overseeing superannuation fund operations going forward.

Furthermore, KPMG remains uncertain as to the value of the annual member meetings proposed by the government for superannuation funds. Whilst we recognise that a very small minority of funds already offer something akin to these to members, we remain concerned as to whether the costs may outweigh the benefits of these for the majority of funds.

With regard to ASIC Report 529, the regulator is placing greater focus on ensuring that funds’ disclosure within product disclosure statements, regular communications and fund websites are comprehensive and align with 
underlying fund policies and procedures.

Additional detailed disclosure may provide further challenges for funds, particularly when, in many cases, it is difficult to get members to even read the existing raft of disclosure material already available.

The ASIC report also places focus squarely on insurance within superannuation, with a number of findings validating their concerns in relation to the manner in which superannuation funds default members into occupational 
categories.

KPMG also notes a greater emphasis by various industry groups in relation to the erosion of retirement savings as a result of default insurance. We believe this will only continue to gather pace and will require funds who aren’t already reviewing their default insurance arrangements to do so to ensure these remain appropriate for their membership base.

While we believe that the additional powers for the regulators may improve overall member outcomes, the measures proposed, such as annual member meetings, will require material 
additional work for funds to comply. This will potentially increase costs further in what is already a competitive marketplace, which operates in a cost constrained environment, where fees continue to remain in the in the sights of regulators and ongoing government reviews.

But ultimately super funds will have to comply with the increased regulation while not letting higher costs worsen member experience. That is the new paradigm.  

Adam Gee is the superannuation advisory partner at KPMG.