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APRA’s scrutiny of mergers is set to ramp up, with small funds to come under increasing pressure to consolidate and the regulator warning some merger models may not get the tick of approval.
In a wide-ranging speech to more than 500 delegates at this week’s AIST’s Conference of Major Super Funds, APRA deputy chair, Helen Rowell said the regulator was “not convinced” that all mergers were “producing a new entity that has either the governance capability or the scale to be sustainable over the long-term.”
Ms Rowell, who is set to hand over the role of overseeing superannuation to new APRA Member, Margaret Cole from 1 July, said there were currently around a dozen potential mergers under consideration, with “an emerging industry view” that any fund with less than around $30 billion in assets under management is increasingly going to be uncompetitive against the so-called ‘mega-funds’.
“While there will inevitably be debate about the threshold level of assets needed, we agree with the sentiment,” Ms Rowell said.
Ms Rowell said the super system still had “too many funds overall, too many underperforming funds, fees that need to come down further, and a number of funds that probably lack the scale needed to deliver optimum member outcomes over the medium to long term”.
“Smaller, underperforming funds would ideally consider merging with a larger, better performing partner rather than another small fund – especially one that is also underperforming. APRA doesn’t intend to let perfection be the enemy of the good. But we expect trustees to consider whether a small fund to small fund (or bus-stop) merger is going to tackle underlying issues or just be a temporary stop on the way to the ultimate destination of sustainability.”
Ms Rowell also warned funds to expect greater scrutiny on the performance of their Choice products, noting that the Choice heat map would be released before the end of the year.
“The choice heatmap is set to highlight in bright red precisely which multi-sector products are charging the highest fees or have the poorest investment performance. So, all trustees would be wise to be taking a close look now at the outcomes they are delivering for their choice members and taking proactive steps to fix any identified weaknesses.”
As part of the choice heatmap development process, Ms Rowell said APRA had been analysing the performance of multi-sector choice products and intending to publish its findings in coming months.
“One observation I will foreshadow, and which is not new by any means, is that administration fees in the choice sector are notably higher than they are for comparable MySuper products. There is also a wider range of investment performance outcomes in these choice products compared to MySuper products, particularly at the poorer-performing end of the spectrum.”
ASIC’s scrutiny of the conduct of super trustees will continue to be a focus for the regulator, with a focus on ensuring super funds operate in a way that is fair for members and promotes confidence in superannuation.
In a speech to delegates at this week’s AIST’s Conference of Major Super Funds, ASIC Commissioner, Danielle Press said that ‘good intentions, reliance on disclosure and dealing with individual issues instead of identifying systemic problems’ was not enough to meet the standard of conduct required of superannuation trustees.
A particular area of focus for ASIC is Internal Dispute Resolution with the regulator completing a recent survey of super trustees on their preparedness for the changes that start on 5 October this year. Ms Press highlighted some results that concern the regulator including that close to 30% had not yet briefed their board on the changes to trustee obligations, over a third of trustees said they don’t currently handle objections to a death benefit distribution decision as a complaint and that for the 9 months to 31 March 2021 around a quarter of all trustees had more than 50% of their complaints take over 45 days to resolve.
In relation to Design & Distribution obligations also commencing on 5 October, Ms Press identified a common theme running through this and Member Outcomes is trustees taking greater accountability for how their decisions affecting members play out in practice. Ms Press said that if trustees “get the product governance framework right, compliance with the other obligations will be so much easier”.
Covering off trustee responsibilities in relation to whistleblowing, ASIC have identified a number of areas of improvement. Ms Press provided the example that close to half the policies in ASIC’s sample omitted at least one key element when explaining how potential whistleblowers can report their concerns and qualify for protection under the Corporations Act. She also noted that while not a legal requirement, trustees are strongly encouraged to make their whistleblower policies publicly available.
National employer association, Ai Group, has warned that the Government’s Your Future, Your Super (YFYS) Bill would take Australia’s superannuation system in the wrong direction and do more harm than good.
In a strongly worded media statement released this week, Ai Group CEO, Innes Willox, said Australian retirement incomes would suffer if proposed measures in the YFYS bill were put in place.
The Ai Group’s concerns – all shared by AIST – include:
• The clear risk that it will leave more people in poor performing funds for longer.
• Its approach to performance measurement is selective and incomplete and will not improve the choices made by fund members.
• It would create new compliance burdens that would add new costs and risks and would divert management and board attention away from improving retirement incomes of fund
• The arbitrary powers granted to the Treasurer of the day, no matter which party they are from, would set a dangerous precedent and would add a new and unpredictable source of
sovereign risk to the investment process.
“These outcomes could have been avoided if the Regulatory Impact Statement (RIS) requirement had not been side-stepped. A Bill as disproportionate, ineffective and intrusive as this would not survive a genuine RIS process.
“This failure was then compounded by a Senate Committee Majority Report that said nothing: it was sadly simply a rubber stamp,” Mr Willox said.
As noted in last week’s policy news, time is running out for Parliamentary debate on Your Future Your Super legislation ahead of the scheduled start date on 1 July, 2021. The House of Representatives is sitting next week 24 to 27 May, and 1 to 3 June. Even if the legislation was to pass, this leaves very little time for industry and employers to implement the changes.
An easy way to better understand the concerns that Ai Group, AIST and many other stakeholders have with the proposed legislation is to listen to our two podcasts on the issue.
Your Future, Your Super - a panel discussion and Best Financial Interests duty – concerns with proposed legislation
As the 5 October commencement date for product design and distribution obligations moves closer, AIST has sought clarity from ASIC on a number of issues raised by our member funds about the obligations.
In a meeting with ASIC this week, AIST sought further details on ‘significant dealings’, ‘reasonable steps’, and the role of entities such as rating agencies and gateways.
While ASIC does not currently intend to provide further regulatory guidance, ASIC provided a series of slides which will be of assistance to funds.
In relation to ‘significant dealings’ and ‘reasonable steps’, ASIC says funds must consider the process of signing up a person to a product, particularly in the context of comparison and rating websites. Funds are encouraged to consider the implications of any arrangements with ratings agencies.
ASIC continues to engage with the industry on the new obligations and we encourage member funds to raise any further issues with us. AIST will be hosting another forum to help funds continue their preparation for compliance of the obligations. Further details will be provided in the next few weeks.
The Retirement Income Covenant is the “next cab off the rank” for the government, Jane Hume, Minister for Financial Services and Superannuation has confirmed.
In a speech to the Conference of Major Super Funds this week, while no specific timing was confirmed, Minister Hume said the government would look to progressing policy how super funds support their members in the drawing down their savings “once we pass Your Super, Your Future legislation”.
“So much of the discussion around retirement is about accumulation…but we know the purpose of our retirement income system is to do just that: provide income in retirement and smooth consumption between working life and retirement.”
“The Morrison Government is committed to progressing the Retirement Income Covenant, which at its core will require trustees to have a strategy to generate higher retirement incomes for their members.
“The Covenant allows super funds the flexibility to tailor their retirement income strategy to their specific membership base, while also allowing them to deliver solutions they think will work best for the particular cohorts of members in their fund.”
Australians who dipped into their superannuation during the height of the pandemic are up to $3644 worse off today, according to research from the McKell Institute.
More than three and a half million Australians withdrew a total of $36.4 billion from their super accounts last year as part of the early super access scheme, many draining their savings altogether.
The McKell research Buy high, sell low? The early super access scheme and foregone returns on investment. found that if that money had instead remained untouched in Australia’s largest superannuation funds, the figure would have grown to $41.1 billion by now – an extra $4.7 billion in returns.
After hitting a low in April, 2020, Australian super fund indexes jumped 15-20 per cent in value as the economy bounced back.
Treasury, in conjunction with APRA, is seeking feedback on its proposed Financial Institutions Supervisory Levies (FISLs) for 2021/22.
The levies aim to recover the majority of the costs incurred by APRA and other Commonwealth agencies through their regulatory activities under the Australian Government’s cost recovery policy.
Aside from APRA, costs recovered include costs incurred by the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO), the Gateway Network Governance Board (GNGB), and the Australian Competition and Consumer Commission (ACCC).
The levies are linked to APRA’s implementation of its strategic priorities under its 4-year Corporate Plan, which for 2020-2024 includes maintaining financial system resilience; improve outcomes for superannuation members; improve cyber resilience across the financial system; and transforming governance, culture, remuneration and accountability across all regulated institutions.
Treasury seeks feedback by 11 June 2021. The Discussion Paper can be found here.
AIST intends to complete a submission on the Discussion Paper and invites members with feedback to contact Carlos Lopez at email@example.com
APRA has released information to assist funds in preparing for APRA Connect.
The first data collection to be introduced in APRA Connect when it goes live in September 2021 will be the Super Data Transformation collections, due in Sept.
The APRA Connect test environment will be available from 17 June for users to become familiar with APRA Connect and trial submission of data before they need to subject in the APRA Connect production environment from 13 Sept, 2021.
For more info visit APRA Connect.
The Government has released exposure draft legislation which changes some administrative requirements for the calculation of exempt current pension income (ECPI).
The draft legislation provides choice for superannuation fund trustees to use their preferred method of calculating ECPI where the fund is fully in the retirement phase for part of the income year but not for the entire income year.
The draft legislation will also remove a redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI, where the fund is fully in the retirement phase for all of the income year.
The exposure draft legislation and supporting materials are available on the Treasury website and stakeholders are encouraged to provide their feedback. Consultation will close on 18 June 2021.
Stay up-to-date on the current status of superannuation Bills currently before Parliament here.
21 May 2021