Regulators discover fire, but where will they light it?

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The AIST has 55 profit-for-member fund members. There are another 142 APRA-regulated large funds, 117 of which are for-profit commercial funds. A majority of the total of 194 APRA-regulated large funds has already outsourced most or all of its investments and many have outsourced other administrative or even trustee-type functions.

APRA in late 2017 identified 28 funds which were “consistently underperforming” and has subsequently held discussions with them to lift their game or exit the industry. Since then, helped by a few mergers, APRA has reduced its estimate of problematic funds to nine which have not responded to its entreaties. Thirteen of the others have agreed to “restructure or exit”, four have satisfied the regulator by “revising their fees” and two have lifted their game with returns.

APRA actually regulates a whole lot more small super funds, largely because of an historical accident. According to the latest APRA report, for the December quarter, there are still 1,902 “small APRA funds”, which are those with fewer than five members but which continue to use external (non-member) trustees. The accident was that they got left behind when the ATO took over administering SMSFs in 2014 and they have been slowly dwindling in number since. They account for about $2.1 billion. BDMs note: you can find their details from APRA.

Both Ian Silk, AustralianSuper chief executive, and Helen Rowell, APRA deputy chair, emphasised to the CMSF conference last week that getting rid of consistently underperforming funds was and should be a priority. Well, it doesn’t seem like there are too many left.

Both Rowell and Sean Hughes, from ASIC, said that their organisations would be more aggressive in future in pursuing possible miscreants in their respective jurisdictions. Rowell said APRA was disappointed Parliament had not yet passed legislation to give it greater powers to prosecute breaches of obligations to members. And both regulators can rightly claim that budget cuts have not helped their efforts.

Nevertheless, the regulators came out of the Royal Commission almost as badly as the banks and other financial institutions. This was not only because of perceived incompetence, it was also because they were seen to be way-too cosy with the organisations they were supposed to regulate.

The other issue for APRA is its preoccupation with fund fees. As the main proponent of the introduction of MySuper, it has been often criticised for paying more attention to “headline” fees and charges and not enough attention to after-fee after-tax returns to members. APRA has denied this but the criticisms continue given what has happened in the marketplace.

Most – about 80 per cent – of commercial super funds and a lot – nearly half – of profit-for-member funds have market-cap or plain-vanilla indexed MySuper options. Most retail funds have so-called ‘lifestyle’ MySuper options, which are automatically adjusted to a person’s age. Profit-for-member fund options are more nuanced. The MySuper options have fared badly last year as most equity markets fell. As everyone in the industry knows, market-cap index funds are great to have in a rising tide but not so good when the tide recedes. Research firm ChantWest, which has done a lot of work on MySuper products in the past few years and which has generally been critical of their processes and outcomes, has an instructive recent note on the subject.

– G.B.

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