The superannuation regulator, APRA, has signaled that it is going to be taking a potentially tougher stance with super funds over the next year, challenging the superannuation industry to lift its game. APRA has recently commented that it is observing an environment where a big gap is opening up between large super funds and the rest, and all funds should be able to demonstrate they are able to meet the challenge of future growth.
The new divide in super is as much between big and small funds, as it has been between retail and industry funds.
The key themes from APRA are that super funds need stronger, more proactive strategic and business planning processes, increased capacity to understand and analyse their operations, and stronger overall governance – and that some funds will be better able to do this than others.
These are not just abstract observations but are highly likely to be key drivers in APRA’s engagement with super funds, and will result in changes to the structure and operations of the industry at both an individual and an industry level.
In both a recent speech from the APRA Deputy Chair, Helen Rowell, and in their submission to the Productivity Commission inquiry into the efficiency and competitiveness of superannuation, APRA has underlined their concerns about net contribution flows, and weaknesses that prevent funds being able to serve their members well.
While noting that net contribution flows remain position at an industry level, almost half (45%) of APRA-regulated super funds had a net outflow rate exceeding 100% in 2014/2015. Not surprisingly, they are concerned that being cash-low negative can have potentially significant implications for the future strategy and viability of super funds in this situation.
“This is a critical issue that is probably not getting the attention that it should across the industry as a whole”1
This trend is being driven by the increasing number and values of member accounts for over 50’s – 29% now compared with 22% ten years ago. These members hold 63% of benefits. This trend is set to continue.
As well as being associated with increased benefit payments, older members also mean that funds have to include post-retirement products as an increasingly important part of their business models.
APRA is explicitly calling on funds to ensure they do not have weak planning and monitoring processes, as these would not serve members nor address these issues well.
Strong planning frameworks need effective ways of monitoring performance against plans and processes to undertake remedial action. Behind all of this however is a need for quality, detailed and analysable data. New data reporting requirements since 2013 have meant that super funds are highly likely to be in a better position to actively review their data as part of their strategic and business planning and monitoring.
For funds, this has always been important. The change here is that it is now fundamental to better use data and technology to position your fund for the future.
1 Helen Rowell, Deputy Chairman, APRA “Governance & culture in superannuation” AFR Banking & Wealth Summit, 5 April 2016. p.6.