- On 18/11/2019
- Member Outcomes
APRA Deputy Chair Helen Rowell’s address to last week’s ASFA conference was one of the most eagerly awaited events at the conference. In it, and in information papers subsequently released by APRA, APRA has outlined the measures that it will publish in its MySuper heatmap. APRA also published a sample version of the heatmap and is expected to shortly commence conversations with those funds that had products identified as under-performing.
More controversially, a further heatmap, which will identify the performance of each fund for the first time, will be released in December. APRA’s clear intention is that the heatmap will put pressure on the Trustees responsible for under-performing products, via disclosure to members and the media, and by informing APRA’s supervisory intensity and approach.
Many in the industry will be uncomfortable with this increased scrutiny; they may feel that the results are not representative or will argue that the measurement techniques are inherently flawed. In our conversations with funds over recent months, many have expressed concern that any generic measure of performance will not adequately reflect some idiosyncrasy of their fund and may mis-represent its performance.
We agree that superannuation is a diverse industry and that a one size fits all approach to measuring performance cannot make adjustment for the unique characteristics of each fund. However, we consider, in the post Royal Commission environment, APRA has been left with little choice but to become a more active and interventionist regulator and that increased market disclosure and scrutiny is an inevitable consequence of this environment.
The heatmap is here to stay and will be expanded over time to incorporate Choice investment strategies and retirement products. It will review further outcomes including those relating to life insurance. The key matter for funds to consider is how to use and respond to the heatmap.
Embracing the Challenge
We recommend that funds review the APRA heatmap and consider how each metric can be incorporated in the fund’s member outcomes framework:
- Does the metric assist the fund to consider whether the MySuper offering is promoting the financial interests of members, relative to other MySuper products? If so, would it be a useful inclusion in the Annual Outcomes Assessment?
- Does the metric align with a target member outcome for the fund? If so, should it be incorporated in the Business Performance Review?
- Is it prudent to ignore the metric? Even if the fund disagrees with a heatmap metric we would suggest that the metric should not be ignored, rather it should be substituted by another metric which more appropriately considers the circumstances and performance of the fund.
The heatmap provides exception reporting on the performance of each MySuper product and upon the overall sustainability of a fund’s performance. Being highlighted as under-performing is independent high-level feedback that the fund needs to carefully consider as an element of its performance. Key questions to consider would include:
- Is the fund genuinely under-performing? Why / why not?
- How can the fund explain this performance to its members and APRA if it disagrees with the assessment? Does that explanation pass the “pub test”?
- If necessary, what can be done to improve performance?
Conversely, as the heatmap is an exception report, not being highlighted does not necessarily endorse the fund as performing or suggest that there is not room for further improvement.
Choice heatmaps are coming
It is important to consider APRA’s Superannuation Data Transformation project in the context of the heatmap and member outcomes more broadly. The timeline for this project announced by APRA on 7 November, suggested that broader data on Choice products and investment performance would first be collected by APRA for the June 2020 quarter and would be published late in 2020.
If APRA can meet these timelines, funds will have at least one quarter of comparative data for Choice products, when many funds conduct their first annual outcomes assessment in the Summer of 2020-21. For any point in time measures, this could warrant inclusion, though it is likely that a full incorporation of Choice products may have to wait another 12 months. Regulations are also required from Treasury to define the peer group for Choice product comparisons, by offering a definition of the term “comparable choice products”.
Remaining focused on a broad range of outcomes
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 own Target Member Outcomes.
This should not entrench any existing assessment of funds in 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!
Once the marketplace has settled, we expect the bar will have been raised to acceptable levels throughout the industry, and the industry can quickly move beyond all the recent criticism.
Rice Warner is assisting a variety of funds and other industry stakeholders with Member Outcomes and is able to assist funds with remaining implementation tasks, reviews of internally developed frameworks and dashboards against industry practice and with the provision of data, especially insurance benchmarking and member engagement metrics. For more information, please contact Wayne Kenafacke (firstname.lastname@example.org / 03 8621 4110) or Steve Freeborn (email@example.com / 02 9293 3714).