- On February 8, 2019
- APRA, Member Outcomes
2018 was a challenging year for the Australian superannuation sector. There have been ongoing delays in implementing the Protecting Your Super Package (PYSP) from the Federal Budget and much anticipation over the release of the Productivity Commission and Royal Commission Reports.
Prolonged uncertainty in the country’s leadership provided little guidance on the future. In contrast to the Productivity Commission report, the Royal Commission report was benign on matters relating to superannuation. While the Government and Opposition were quick to accept all recommendations of the Royal Commission report, implementation of the superannuation changes is likely to go through a lengthy consultation process.
The criticism of the regulators in both these inquiries means we will expect more vigorous enforcement of superannuation funds. As the first evidence of this, APRA has provided clear guidance regarding its expectations for the way funds monitor how they will deliver their mandate. This guidance, contained within SPS 515: Strategic Planning and Member Outcomes, codifies APRA’s expectations and provides the groundwork for an increasingly interventionist regulator with the power to enforce community expectations.
Ultimately, the member outcomes framework poses an existential question to superannuation trustees – why does our fund exist? Going forward, trustees must ‘earn’ their license to operate and demonstrate the value they deliver their members both on a stand-alone basis and relative to peers. Significantly, the expectation is that funds will need to identify and assess their value to different cohorts of membership separately. This means that a fund will need to segment members into groups, such as retirees or young members. In time, we can expect fund communications material and strategies being tailored to these groups. QSuper has begun this process and now has eight separate cohorts of members.
Funds which do not achieve benchmarks will face strict monitoring by a regulator which has recently been chastised for leniency and the Australian public which, at the time of writing, have no shortage of mistrust toward the financial sector. In contrast, successful funds with strong brands have the potential to redirect default flows their way or to act as an aggregator of underperformers.
So how should funds respond?
Under the requirements of SPS 515, funds are required to:
- Stipulate a vision that outlines the key value-proposition to members.
- Identify quantifiable member outcomes by membership cohort that are consistent with the superannuation fund’s vision.
- Embed member outcomes assessment within the fund’s strategic and ongoing business planning process.
Unfortunately, none of these items are a simple ‘tick box’ and simply purchasing or building a dashboard to monitor outcomes will not be enough to satisfy the governance requirements. Member outcomes need to be at the heart of the fund’s strategy.
Vision sets the groundwork for strategic planning.
Most funds have a generic vision which centres around delivering strong net investment returns and acting in the members’ best interest. However, the recent inquiries demonstrated a number of areas where funds did not act to follow their mission – multiple accounts and badly targeted insurance are examples.
Setting a fund’s vision in the context of the complex Australian superannuation sector is difficult. There is no single one-size-fits-all solution. Strategic vision should balance trade-offs and there will be a corresponding impact on the fund’s business model. Traditionally a fund’s vision might make reference to the segments of the market it operates in and its focus (e.g. Choice/Default, cost/service). The new framework means that funds will need to reorient their vision to member benefits – and the needs of the membership base take precedence over traditional goals.
Outcomes and Strategy
Armed with a clear and defined vision, funds are then obliged to define strategic objectives and metrics with which to measure their ability to deliver on their vision. While in many cases the metrics chosen will be similar, there will be differences. For example, the target outcomes for a cohort of middle-aged white-collar members with average balances over $150,000 will differ materially from a membership cohort in their first jobs with 40 years or more to retirement – and the strategy to achieve these outcomes will differ again!
In aggregate, this will require trustees to think differently about the importance of advice, investment risk, insurance and the relative value placed on services by each cohort of the fund’s membership.
If the fund’s annual member outcomes assessment determines that changes to operations would likely improve member outcomes, the trustee must consider how those changes will be reflected in its annual Business Plan. APRA expects that where a trustee’s measures of outcomes consistently underperform in either absolute or relative terms, the trustee would actively consider whether maintaining the superannuation fund in its current form (either in its entirety or for a cohort of members) is consistent with its obligation to act in the best interests of members.
The first Member Outcomes assessment is expected to be carried out in conjunction with the trustee’s 2020 review of its annual Business Plan. After this point, it is expected that funds will review this at least annually to improve their objectives and strategy. This iteration will also need to accommodate:
- Emerging trends identified in a timely manner;
- Enhanced data sources, particularly for choice products; and
- Peer-based insights derived from benchmarking analysis of other funds’ objectives and strategies.
Redemption or Condemnation?
APRA has flagged that it expects that the metrics inherent within the SPS 515 legislation will be published. While an intimidating proposition for chronic underperformers, publication of these statistics provides the opportunity for a positive dialogue with members, to communicate the benefits that have been delivered (many funds will be able to show real returns for default members of 5% p.a. over 25 years) and to demonstrate continual improvement.
But, this will only be achieved if funds fully embrace the philosophy of targeting and then achieving Member Outcomes and integrate this vision into their strategy. Over time, this will enable funds to regain the faith that has been lost in this last turbulent year. Then, we should be able to focus on positive member outcomes and not the negative outcomes publicised so much over the last year.
For more information on how Rice Warner can assist with strategy work or the development of responses to SPS 515 please contact your Rice Warner Consultant. Alternatively, contact Tim Jenkins (EGM – Superannuation) or Wayne Kenafacke (Senior Consultant)