Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Small funds shouldering APRA’s ‘unreasonable and unjustifiable burden’
Super funds managing less than $20 billion have been saddled with an “unreasonable and unjustifiable burden” following a substantial increase to the supervision levies charged of them by APRA, according to a submission from industry fund First Super, but the regulator hasn’t pursued “fairer alternatives”.
APRA meets its costs by imposing restricted levies (which reflect the cost of supervising an industry and are subject to maximum amounts) and unrestricted levies (which cover costs relating to “systemic” regulation and which have no minimum or maximum) on the entities it supervises.
But while the unrestricted levy has increased for all segments of the APRA-regulated superannuation industry, the restricted levy for a number of funds managing less than $20 billion has leapt more than 80 per cent in some cases this financial year and is set to rise by as much as 35 per cent in 2024-25. The largest funds already pay the maximum restricted levy amount ($800,00) and so will see no increase.
“This, in our submission, is unreasonable and contrary to the cost recovery guidelines and at odds with the increased supervisory efforts for large funds relative to smaller less complex funds,” the First Super submission says, noting that the system-wide risks upon which APRA is focussed largely stem from the increased size of the superannuation sector and are being amplified by investment internalisation.
“If the proposed restricted levy is approved a fund with approximately $7b in assets will pay the same amount as a $335b fund. It cannot be that the supervisory effort is the same for the former fund as the latter, which is nearly 48 times larger in funds under management.”
Part of the problem is that the maximum restricted levy (MRL) hasn’t been indexed even as the superannuation industry has seen “considerable growth in size and complexity” as it matures. Indexation would see the maximum restricted levy rise to $849, 818 and big funds shoulder more of the costs for APRA’s supervision of the industry.
“This would be a fairer outcome, but not an equitable one,” the First Super submission says. “Further consideration should be given to APRA’s linear modelling of the costs of supervision in which $1bn at a small fund is seen as the same cost as the one-hundred billionth at a large fund.”
Cost cutting and transparency
The increase to the restricted levy for small funds has been highly controversial because the cost will inevitably be passed on to members at a time when the entire industry is under pressure to cut fees. Last year’s 80 per cent increase in the restricted levy for smaller funds even as APRA’s funding needs increased by slightly more than three per cent.
“The superannuation industry is facing increased scrutiny, including as a result of the Your Future, Your Super legislation,” the Association of Superannuation Funds of Australia wrote in its submission. “In particular, the performance benchmarking of products incorporates administration fees.
“Any increase in financial institutions supervisory levies (FISLs), or other similar industry levies, ultimately will be borne by members – as higher fees (or indirect costs) than otherwise would be the case. As such, ASFA considers it appropriate that a high level of scrutiny should apply with respect to the costs recovered from industry via the FISLs.”
That scrutiny would ensure that the increased levies don’t raise more than the cost of additional regulatory effort, which would otherwise act as a “tax on regulated entities” and could create barriers to entry in the industries that APRA supervises.
“While the (APRA’s consultation paper) provides more information about APRA’s high-level regulatory activities compared with previous years, it does not provide sufficient detail for industry to adequately understand how levies are determined,” the ASFA submission says. “As such, there is not sufficient information for industry to determine whether the additional increase in funding for 2023-24 (that is, $3.6 million) was justified (in whole or in part), or whether it would have been more appropriate for APRA to reprioritise other activities.”
