Australia’s largest super fund has warned APRA against implementing prescriptive governance requirements that impose conformity on super funds and dull innovation.
In a recent submission to APRA’s Governance Review, the super fund said any reforms arising from the review should be directed towards enhancing the effectiveness of directors, rather than simply increasing compliance obligations.
APRA released its Governance Review consultation back in March which outlined eight proposals aimed at improving governance practices among superannuation funds and other entities it regulates.
AustralianSuper stressed that the primary responsibility for good governance and prudent risk management and accountability should reside with the board and senior management of an entity.
The fund said it supported ARPA’s long-standing principles-based approach to the prudential framework to the industry as a whole.
“Principles-based governance maintains strong outcomes while allowing for diversity of practice according to the size, business activity and strategic requirements of the institutions being supervised,” it said.
“Diversity of practice is an important feature of the Australian superannuation system which has led to a degree of innovation and competition in Australia that is not seen in pension systems in comparable countries around the world.”
The super fund outlined that competition was a powerful discipline on boards to continually improve their governance arrangements as good governance leads to better outcomes for members.
“Competition and the ongoing need to invest in improved systems continues to drive funds to strengthen risk management and deliver better services to members,” the submission said.
“An environment of increased superannuation industry consolidation has increased these positive competitive forces, as funds position themselves to navigate a future of significant opportunity, where it is clear that success will be achieved only by those funds that consistently deliver for their members.
“AustralianSuper would caution APRA not to use this Governance Review in a misguided way to deal with old problems which are more appropriately addressed through these competitive forces and the regulator’s existing supervisory powers.”
AustralianSuper said it would be unfortunate if the review were to result in an overly prescriptive approach to governance.
“Maintaining a principles-based approach supports both the independence of the sector and the accountability of boards for delivering strong outcomes to members, while ensuring the regulatory framework promotes competition and remains flexible, adaptive and focused on substance over form,” it said.
“We believe that any reforms arising from this review should be directed towards enhancing the effectiveness of directors, rather than increasing compliance obligations for their own sake.”
The super fund specifically raised concerns about APRA’s proposal to impose mandatory term limits on all directors without exception, warning this may undermine the value and skill of experienced directors.
“Imposing mandatory term limits on non-executive directors is a blunt approach to regulating governance which potentially focuses on individual directors at the expense of considering the board as a whole,” it said.
“It undermines the value that skilled and experienced directors with deep institutional knowledge can bring to ensuring the best outcomes for members.”
If APRA does proceed with a tenure limit, AustralianSuper said the limit should not be less than 12 years, consistent with current APRA guidance.
“Importantly, funds should have the ability to extend a director’s tenure beyond 12 years in exceptional circumstances,” it said.
It also warned APRA that mandating detailed, technical and role-specific skillsets for every individual director would risk diminishing the collective capability of the board by skewing decisions to those directors with recognised skills on a particular subject and marginalising other directors.
“We consider the relevant expertise of directors on particular subjects needs to be well balanced with the collective responsibility of the board as a whole,” it said.
The super fund said while it supports proposals to raise minimum standards for directors and boards, the right balance needed to be struck so that focusing on individual director skills does not undermine the capacity of the board to work effectively together.
“We reiterate AustralianSuper’s support for the importance of a board’s collective competence per the SIS Act and suggest APRA avoids unintended disqualification of otherwise fit directors through formulaic skills assessments,” it said.
“Skills matrices should remain entity-specific and flexible to reflect strategic evolution, rather than codified into overly rigid categories.”
