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‘Don’t wait for APRA to blow the referee whistle’: Cole

While APRA “doesn’t feel the need to start each year with a shiny new set of initiatives”, it’s still planning on scrutinising super funds’ valuation practices and giving more “sub-scale” funds the nudge to merge in 2023.

“Superannuation members have simple expectations of the APRA-regulated entities in which they have entrusted more than $2.2 trillion in combined retirement savings,” APRA deputy chair Margaret Cole said in a speech on Monday (January 30). “Members want well-managed funds, simple clear information, and good retirement income options.”

“This helps ensure that their money is well looked after for their future and a dignified retirement. They rightly expect trustees to act in their best financial interests. These expectations are not new and they are, after all, what this system is all about.”

To that end, Cole says that “rectifying substandard industry practices remains a key priority” for the prudential regulator, with a particular focus on marketing expenditures and unlisted asset valuation practices. APRA recently introduced bolstered draft guidelines and principles that govern the way super funds value investments, including unlisted assets such as private equity and property.

The intervention comes after the regulator’s 2021 superannuation thematic review found existing valuation frameworks were in most cases “inadequate”. Board engagement was also limited, while super funds routinely accepted external valuations without challenging their appropriateness.

Many of you will have already experienced APRA’s ongoing focus on these areas last year. We called for additional information from a number of you in relation to your valuation practices of certain unlisted assets,” Cole said. “We explored marketing and sponsorship expenditures to understand how your decision-making process had considered the best financial interests duty.”

“Our supervisors will continue this focus this year, and APRA will also assess the preparedness of trustees to respond to investment market stresses, including possible liquidity stresses.”

While the superannuation industry is still waiting with bated breath for the outcome of Treasury’s review of the Your Future Your Super (YFYS) performance test (with any changes expected to be made before the next round of testing in July), Cole warned funds not to become complacent in the face of what will likely be viewed as positive regulatory change.

“We all know that the government’s review into the Your Future, Your Super reforms is yet to conclude,” Cole said. “But we encourage trustees not to delay examining the performance of all their products as well as the fees that are charged. Regardless of the outcomes from the review, performance and sustainability will remain a key focus of our supervisory work, so don’t sit back and wait.”

“We will continue our scrutiny of business models that are challenged in delivering long-term sustainable, competitive outcomes for members,” Cole said. “Our actions to date, including the issuance of licence conditions requiring some funds to find a suitable merger partner, are a clear message to funds that have sustainability issues that we expect them to consider with clear eyes whether consolidating into another fund is in the best interests of members.”

APRA is also considering how the prudential framework might be adjusted to ensure super trustees are focused on improving retirement outcomes for their members following the advent of the Retirement Income Covenant. Both APRA and ASIC are undertaking a thematic review that examines how a sample of trustees have implemented the RIC within their operations, and while the “primary intention” is to use the findings to consider enhancements to prudential standard SPS515, they “will address deficiencies where they are identified”.

“APRA will continue to strengthen the resilience and prudential management of the superannuation industry, ensure a stable financial system and work to protect the financial interests of fund members,” Cole said. “Ultimately, though, the success of your fund is in your hands. Don’t wait for APRA to blow the referee whistle. When it comes to delivering the best outcomes for your members, you know best what needs to be done.”

With additional reporting by Lachlan Burr-Jensen.

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