Super funds have until January 2020 to get their draft outcomes assessment plan in place but……what plan will super funds have to produce?
There are two alternate and different options for meeting outcomes assessment requirements. One of which will become the final legal requirement while the other will not. That is the dilemma for super funds.
In December last year, APRA released a new superannuation prudential standard – rules made by APRA that have the force of law – for their version of the outcomes assessment test to apply to both Choice and MySuper products.
A central requirement of the APRA rules is for funds to consider a broad range of factors. APRA suggests that these metrics include but not limited to:
- risk-adjusted investment returns net of investment fees;
- administration and other fees;
- insurance product design, premiums, claims management, and terms and conditions;
- retirement products; and
- member services, engagement, and education.
The APRA rules are in force and are legally binding, but they can – and may very well – be displaced by legislation made by Parliament.
At the time APRA issued its new rules they knew there was a bill before Parliament that would also apply an outcomes assessment test on super funds. They explained that this wasn’t a problem because what APRA had done was consistent with the bill. But second-guessing what Parliament is going to do can be a risky business.
Parliament doesn’t just rubber stamp everything the Government put before it. Parliament not the Government makes the laws, and in this case, Parliament made lots of amendments. These amendments mean that the APRA outcomes assessment rules are no longer consistent with the outcomes assessment legislation.
Unfortunately though for super funds, the Parliament is still a bee’s whisker away from the final stages of passing the amended bill. They were expected to do so in the February session, but it didn’t quite happen.
Parliament will get another go at passing the bill during the Budget week in April. There’s a fair chance the bill will be passed, and the APRA rules will have to be rewritten. If the bill isn’t passed, then the Government is going to call an election for May, and legislation not completed – including the bill for the outcomes assessment – will lapse – and the existing APRA rules will continue to apply.
All of this means there’s a fifty/fifty chance that either option will prevail. This makes planning by super funds very difficult.
Amongst the successful amendments to the legislation was a narrowing of the metrics to be considered in the outcomes assessment. Under the amended bill, the focus of both MySuper and choice assessments has to be on fees and costs, returns, and investment risk. This means that the APRA requirement to benchmark member services (for example) as part of the test no longer applies. This is a victory for those who have called for the outcomes assessment to be focused on long-term net returns, with other matters to be secondary considerations.
It will be interesting to see how APRA reconciles the new requirements under the bill (if they become law) with its comments that “… a focus on net investment returns to the exclusion of other considerations would not be sufficient as it would not capture other key factors that impact member outcomes.”
The amended bill also gives the Government powers to make regulations relating to the outcomes assessment requirements suggesting that APRA’s outcomes assessment prudential standard may also be displaced by the regulations. By the April it will become clear whether the APRA rules or the legislation will have prevailed, although if the rules are to be set by legislation, the associated regulations are unlikely to be settled by then.
Super funds will have to hit the ground running when we finally get clarity about outcomes assessment requirements. Funds will continue to put the interests on their members first, but the process for implementing new requirements does not always make this easy.