Outcomes Assessment Act: Powerful New Legislation Targets Under-Performing Super Funds
Powerful new legislation targets under-performing super funds and a whole lot more
The new Members Outcomes legislation really packs a punch and it’s surprising there hasn’t been more media about its likely impact. Big new powers for APRA, a new test funds must pass to stay in the industry, restrictions on fund inducements to employers and new investment disclosure laws will separately and jointly have a major impact on the industry. Each element will require careful analysis and planning by funds.
In a frenetic and sometime confusing penultimate week of Federal Parliament before the election, the Government finally passed its Improving Accountability and Member Outcomes in Superannuation legislation – passage of the legislation was in doubt until it actually passed. The legislation was signed into law on Friday by the Governor General.
The legislation has been before parliament for almost two years but it still got addressed faster than some other legislation, like the Objective of Superannuation Bill that is still languishing after three years.
APRA gets new super powers…
APRA has welcomed its broader directions powers to take action against under-performing super funds, and to take civil penalty action against funds not meeting their best interests of members obligations. This means that APRA doesn’t have to wait for the law to be broken but can now intervene at an earlier stage – before members suffer significant harm.
What this means in practice is that APRA will be pursuing under-performing funds to merge or exit the industry. Many funds with less than $1 billion of assets are likely to be in this basket, and a small number of larger funds. APRA will be under scrutiny to show that it can quickly and effectively manage this task and do so in a way that doesn’t further disadvantage the members of these funds.
…but APRA didn’t get everything it wanted
The legislation also requires funds to undertake annual outcomes assessment against prescribed benchmarks, including all of their MySuper and choice product options. This is where APRA didn’t quite get what it wanted and APRA is working out how the prudential standard it issued last December will need to be amended to accommodate the new legislation.
In the final version of the legislation criteria to be considered in the outcomes assessment was reduced. 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.
The legislation 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.
Super funds will have to hit the ground running now that we finally have more clarity about outcomes assessment requirements. Funds have until January 2020 to get their draft outcomes assessment plan in place so the preparation of these plans is going to jump to the top of fund priority issues.
Prohibition on employer inducements
The legislation was also amended to implement the Financial Services Royal Commission recommendation that funds be prohibited from inducing employers to have them nominate the fund as a default fund. Funds and their associates breaching these new laws will be liable to civil penalties.
While the industry is still waiting on details of the scope of this prohibition (eg, does a sponsorship arrangement contravene this law?) directors of funds need to review existing practices, ensure compliance or risk facing possible civil penalties.
Portfolio Holdings Disclosure
Twice a year, funds now must disclose details of their investments, to level of the underlying asset held directly or through associated bodies. Funds will be required to publish the details of their portfolio holdings on their websites within 90 days after each June 30 and December 31 reporting date.
Annual Member Meetings
Finally, the legislation also requires APRA-regulated funds to hold annual members’ meetings.
Written by David Haynes
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