Strengthening member outcomes in superannuation - APRA's proposals

By Michelle Levy
Financial Services Risk & Compliance Superannuation

In brief

APRA this week released a discussion paper and draft prudential standards and practice guides. The standards and guides will apply to all RSE licensees from 1 January 2019. As Partner Michelle Levy and Senior Regulatory Counsel Michael Mathieson report, they will lead to significant changes across the superannuation industry.

15 December 2017


APRA released 'Strengthening superannuation member outcomes', which consists of a discussion paper and draft prudential standards and practice guides, on Wednesday, 13 December. The prudential standards will apply to all RSE licensees from 1 January 2019 and require them to have a business plan, a focus on expenses and to adopt and maintain a risk management framework like other APRA regulated entities and to undertake an assessment of outcomes for all beneficiaries every year. The draft prudential standards and practice guides are, happily, pretty clear and to the point, but they are going to lead to very significant changes across all sectors of the superannuation industry. 

APRA has been saying for some time that RSE licensees operate financial services businesses. And while that is not a problem of itself, it is difficult to reconcile with the SIS Act regime which proceeds on the basis that an RSE licensee is a trustee collecting contributions, paying benefits and investing the assets to provide retirement and disablement benefits to beneficiaries and death benefits to their dependants. These prudential standards are going to create some tensions for an RSE licensee in trying to reconcile the 'business' the standards refer to, with the superannuation fund of which it is the trustee. 

Submissions due by 29 March 2018

Consistent with the focus of the package, APRA is keen to get feedback on compliance costs that would be incurred by businesses as a result of the proposals. If you would like to comment and respond to APRA's questions, you have until 29 March 2018. 

SPS 220 Risk Management

Under Prudential Standard SPS 220 Risk Management, RSE licensees will be required from 1 January 2019 to maintain a risk management framework, a risk appetite statement, a risk management strategy, and a business plan like other APRA regulated entities.

This is pretty familiar territory – it is very much like Prudential Standard CPS 220 Risk Management that applies to banks and insurance companies. But RSE licensees and banks and insurance companies are not the same. Banks and insurance companies are indistinguishable from their businesses – they own their assets. An RSE licensee is a trustee of a superannuation fund. The beneficiaries have an interest, recognised by the law, in the assets. 

SPS 220 will require an RSE licensee to have a risk management framework that 'appropriately manage[s] the risks to its business operations and the interests of beneficiaries'. And this is the first indication of how muddy things might get. Where do an RSE licensee's business operations start and end? SPS 220 assumes there is a bright line, although it does not say where. 

An RSE Licensee must maintain a written business plan for its business operations (there's that term again) setting out its approach for the implementation of its strategic objectives. It is not clear whether the strategic objectives are for the fund or the RSE licensee's business operations. 

The draft standard says that where an RSE licensee conducts a business other than superannuation (APRA, at least, is in no doubt that an RSE licensee is conducting a business when it acts as the trustee of a superannuation fund), its risk management framework must cover all material contagion risks that the non-superannuation business might have on the superannuation business. It is implied that the non-superannuation business is not part of the RSE licensee's business operations for the purposes of the standards, but where the line is drawn is difficult. For example, if an RSE licensee also provides financial advice to members, is that part of the RSE licensee's business operations or is it a non-superannuation business? 

And the line is going to be very important for RSE licensees when it comes time to comply with the standard.

Where an RSE licensee is part of a group, it can adopt group policies, if the RSE licensee's board approves them having ensured that they have appropriate regard to the RSE licensee's business operations. An RSE licensee must have a board-approved risk appetite statement and a designated risk management function that is responsible for assisting the board, board committees and senior management to develop and maintain the risk management framework. It must be operationally independent from other business units of the RSE licensee. It must have authority and report to the board, board committees and senior management. 

The board is required to provide APRA with an annual risk management declaration, and if there are significant breaches or material deviations from the RMS or if the RMS did not adequately address a material risk, the RSE licensee must notify APRA within 10 business days. 

The board must approve strategic objectives for the RSE licensee's business operations that support the delivery of the outcomes it seeks for its beneficiaries and ensure the financial soundness of the RSE licensee's business operations. Strategic objectives must be specific and measurable and informed by investment strategies, insurance strategies, the annual outcomes test and section 62 of the SIS Act. References to the SIS Act sit uncomfortably in the draft standard in the context of all the discussion about business operations and they do not suggest that APRA is merely referring to the superannuation fund. 

This is very clear in the proposed obligation for an RSE licensee to establish and maintain an expenditure policy setting out how the RSE licensee ensures that fund expenditure is consistent with its strategic objectives. Only in this part of the draft standard does APRA make the distinction between the RSE licensee and the 'fund' clear. It says that fund expenditure relates to any cash outflow and expected future cash outflow from the assets of an RSE (and notably not the RSE licensee).

APRA's focus on superannuation fund expense management finds a nice counterpart in the Royal Commission's proposed term of reference concerning the use of 'superannuation members' retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members'.

SPS 225 Outcomes Assessment

Prudential Standard SPS 225 Outcomes Assessment will also apply to all RSE licensees from 1 January 2019. It will require an RSE licensee to make an annual assessment of the 'outcomes' provided to beneficiaries and a determination of whether future outcomes could be improved through changes to its business operations (there's that term again). 

The outcomes assessment must detail the outcomes that the RSE licensee seeks to provide to beneficiaries and how that will be assessed and the RSE licensee's conclusions as to whether the outcomes it seeks to provide are being provided. Outcomes must be measured with reference to objective benchmarks and targets, as well as outcomes provided to beneficiaries of other RSEs. In measuring outcomes, the RSE licensee must have regard to the investment strategies, the insured benefits, the options, benefits and facilities offered, the scale of the business and any significant expenses.

The assessment that must be done for MySuper (under the current law, the scale test) can be wrapped up in this, and while that is a good idea, it is not entirely clear where the RSE licensee's duty to promote the financial interests of MySuper members fits in all of this. Perhaps, the less said about that particular duty the better.

The proposed amendments to the MySuper scale test are in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, currently before the Senate and, ahem, a little bit stalled. As to the relationship between the MySuper test (as proposed to be amended) and APRA's proposed fund-wide outcomes assessment, APRA says: 'APRA will seek to ensure that the requirements under SPS 225 appropriately align with any legislative requirements, when the final legislative position is known.' Indeed.

An exotic creature

If these standards are made in their current form, we think that a court might be hard pressed to say that an RSE licensee's duties follow those of a trustee at general law, as they have largely done to date. In that case, an RSE licensee will become an increasingly exotic creature, difficult to explain and perhaps uncertain as to its own function and responsibilities.