Member Outcomes is shaping superannuation

Changing the conversation

The Productivity and Royal Commissions concluded that significant change was needed to make the superannuation industry more efficient.  One of the themes of both reviews was the deed to focus on improving member outcomes, which has been incorporated in new Prudential Requirements and amendments to the SIS Act.  These requirements have already changed the conversation.  While most of the industry has historically done a good job of keeping members at the centre of its thinking and daily operations, this focus is sharpening.  Funds are increasingly applying a Members Outcomes test to all their work.

In recent weeks, APRA has released final versions of Prudential Standard SPS 515 Strategic Planning and Member Outcomes and a significantly revised Draft Prudential Guidance SPG 516 Business Performance Review.  These reflect APRA’s consultations during 2019 and align APRA’s framework to the legislative member outcomes requirements now incorporated in Section 52 of the SIS Act.

Perhaps the biggest game changer in Member Outcomes is the revised SIS Act requirement for Trustees to determine whether the financial interests of members who hold each product offered by the fund are being promoted by the trustee, with specific reference to comparable products offered by other superannuation funds.  This determination implies a far higher duty to members than preferencing their interest over those of other stakeholders, such as shareholders or sponsoring organisations.  In assessing the outcomes achieved for members relative to the outcomes being achieved by other superannuation funds, Trustees need to consider not whether the fund is doing the best it can by its members, but whether that best is good enough.

A fund which has a higher cost structure than its peers will need to demonstrate that the services provided are superior enough to justify the cost differential, or it will fail the test.  A practical example of this is for members moving from accumulation to pension phase.  At this point, a fund will need to demonstrate that its pension product and service is comparable with its peers, or the member will be better off in a different retirement strategy.

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When and how to benchmark?

APRA has recognised and acknowledged the complexity of conducting the annual Outcomes Assessment for Choice products, given the wide variety of product features and designs in this segment and lesser availability of open source benchmarking data.    APRA has noted that Trustees do not need to undertake an Outcomes Assessment until SIS Regulations are finalised, which should help funds with the identification of comparable Choice products to include in benchmarking Choice products.  Correspondingly, APRA also amended SPS 515 to provide that Trustees do not need to consider the results of an Outcomes Assessment, in conducting their first Business Performance Review in 2020.

The most recent correspondence from APRA also clarified their expectations around the timing of the Outcomes Assessment and Business Performance Review, as shown in Figure 1.  Funds will need to consider whether this can be accommodated within their current business planning approach, or whether that approach will need to be amended around these requirements.  APRA expect that the Outcomes Assessment will be prepared with reference to their Annual fund-level superannuation statistics, which will put pressure on APRA to publish these at a specified and more predictable time each year.

Figure 1: Annual Timeline for Assessing Member Outcomes

This timeline suggests an acceptance that the Business Performance Review will be conducted at least partly on stale information.  For example, in March to May 2021, APRA suggests that funds will undertake a Business Performance Review, which in part will consider the Outcomes Assessment for the period July 2019 – June 2020.  By allowing that funds do not need to consider an Outcomes Assessment in conducting their first Business Performance Review, APRA have made it easier for funds to conduct that review in January to May 2019 as part of their preparation of FY21 business plans.

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The tension between comparability and customisation

APRA’s recent statements that they intend to publish their own assessments of performance have garnered considerable attention around the industry.  APRA has clarified that they will initially focus on MySuper products, assessing “investment returns, fees and charges, sustainability and (in due course) insurance.”  This seems to build upon APRA’s existing MySuper reporting and the sustainability measures identified in earlier consultations on Member Outcomes.

The initial exclusion of insurance may be frustrating given that the SIS Act requires Trustees to benchmark the fund’s insurance offers against peers in the Outcomes Assessment, but highlights the lack of readily available data¹.

While we would agree that additional transparency regarding the performance of all superannuation funds is to be valued, we caution that funds should not lose sight of the need for the Business Performance Review to consider the fund’s unique Target Member Outcomes.  This should not entrench any existing assessment of funds into league tables.  Ultimately, the Member Outcomes process asks each fund to think critically about what outcomes the fund is aiming to achieve for its members and how the fund’s business plan supports this.  This is not a one size fits all approach, in which all funds aim to deliver the same outcomes and service proposition, and in which the only differentiating factors are having the lowest fees and the highest past investment performance!

While these most recent announcements have delayed the implementation of Member Outcomes with respect to Choice products, we encourage funds to push on with their implementation of this new work.  Many funds are well progressed and regardless of prudential and legislative delays have incorporated Member Outcomes into the current year business plan and will be assessing performance against target member outcomes throughout FY20.

Once the marketplace has settled, we expect the bar will have been raised to acceptable levels throughout the industry, and the industry can move beyond all the recent criticism.

¹ Rice Warner’s Galaxy Group Risk Comparator provides a comparison of both features and premiums across 250 group insurance offers and provides easy to access and readily updated benchmarking data for fund’s Insurance Member Outcomes analysis.