On 23 May 2018 APRA announced that it would conduct a review of the superannuation prudential framework that was introduced in 2013 as part of the Stronger Super reforms.[1] The consultation is scheduled to take place over a four-month period and involve both formal and informal feedback from stakeholders across the superannuation industry.

The structure of the consultation involves the release of an overarching discussion paper that was released on 23 May 2018, together with six targeted ‘short topic’ papers that have been progressively released and cover the following elements of the prudential framework:

  • Governance;
  • Risk Management;
  • Financial requirements, operational risk and outsourcing;
  • Investments;
  • Insurance; and
  • Member flows and products.

Background

The Cooper Review

The establishment of the superannuation prudential framework can be traced back to the Government’s 2009 review into the governance, efficiency, structure and operation of Australia’s superannuation system, known as the Cooper Review. The Cooper Review made a number of recommendations, including that APRA should be tasked with overseeing and promoting the efficiency of the funds that it regulates and that it should be granted a standards-making power in relation to superannuation. Further, the Cooper Review recommended that APRA should be responsible for providing more in-depth data and analysis on the superannuation industry.

Stronger Super

Following these recommendations, the Government granted APRA such a standard making power under the reforms that came to be known as the Stronger Super reforms.[2]

Consequently, in 2012 and 2013 APRA released a number of prudential and reporting standards, together with prudential practice guides, that apply to registrable superannuation entity (RSE) licensees. At that time, APRA also announced that it would conduct a post-implementation review of these standards once the framework had been in place for three to four years.

The objective of the superannuation prudential framework

APRA’s stated objectives for this prudential and reporting framework was to:

  • provide increased clarity and certainty for trustees;
  • where appropriate increase alignment with the prudential framework that APRA applies to other regulated financial sectors; and
  • enhance data collection and publication in order to promote increased transparency in relation to the superannuation industry.

 Purpose and scope of APRA’s review

This consultation is the post-implementation review of the prudential framework that APRA committed to at the time of the framework’s creation.

The review will cover all prudential and reporting standards and guidance released or updated as part of the Stronger Super reforms, which consists of 13 prudential standards, 37 reporting standards and up to 58 guidance documents. However, the review will not consider elements of the prudential framework that have subsequently been released.[3]

The stated purpose of the review is to:

  • consider the effectiveness of the prudential and reporting standards and guidance material, and in particular, whether the objectives underpinning the framework have been effectively embedded in the superannuation industry;
  • assess whether the prudential framework is meeting its stated objectives (as set out above); and
  • assess whether the framework remains fit for purpose, noting that the framework should evolve over time as the industry and operating environments change.

APRA has stated that it is not seeking to adjust the policy settings supporting the prudential framework at this time. Nevertheless, APRA has indicated that it is open to making changes to the framework to address any areas that are identified as not meeting the original objectives, where feedback indicates that particular standards or guidance could be updated to improve efficiency or to address any gaps or other issues detected as part of the consultation.

 What does APRA what to know about the prudential framework?

APRA has asked a number of high level questions in respect of the prudential framework as a whole that reflect the objectives stated above. In addition, in each of the six short topic papers, APRA identifies the relevant prudential and reporting standards that apply to that area of the prudential framework and sets out the objectives and key requirements for each standard or guide. Once the objectives and key requirements for each element of the prudential framework have been set out, APRA then poses a number of questions consistent with those below.

Prudential standards

In relation to each prudential standard and guide, APRA has generally requested information in order to ascertain:

  • What outcomes have resulted from the implementation of the particular prudential standards and do stakeholders consider that these outcomes are in line with the stated objectives for that standard?
  • Do RSE licensees consider that the requirements set out in a prudential standard have been embedded into that entity’s decision-making processes and practices?
  • Is there a perception that the prudential standards or guides have achieved their stated objectives?
  • Do the prudential standards or guides remain fit for purpose given developments within the industry that have occurred since their introduction?
  • Do the prudential standards, when read in conjunction with their relevant prudential practice guides, provide sufficient:
    • Clarity and certainty for RSE licensees in relation to their obligations as trustees of superannuation entities?
    • Flexibility for RSE licensees to achieve the objectives of the prudential standards in a manner best suited to their business?
  • If there are any requirements or principles contained in the prudential standards or prudential practice guides that are no longer applicable, why are they no longer applicable or relevant to the superannuation industry?
  • Are there any aspects of the prudential standards or prudential practice guides that could be improved to achieve better risk management or governance outcomes or to facilitate better supervision by APRA?

APRA more broadly asks whether there are any additional areas that should be addressed as part of the prudential framework or if there are any material gaps in the framework.

Reporting standards

In relation to reporting standards, APRA seems particularly interested to learn whether stakeholders consider that the current reporting standards provide policymakers, regulators, trustees and the community with sufficient information to appropriately analyse the superannuation system. As part of this assessment, APRA has queried whether the granularity of the data provided is sufficient, whether the quality of the data collected is appropriate and where stakeholders see areas for improvement in relation to reporting.

Costs

APRA is also interested in learning what the costs of first implementing, and then continuing to comply with, the prudential framework or particular elements of the framework are for regulated entities. Further, APRA has inquired whether entities consider that these costs have delivered benefits to members or increased clarity or certainty for members or other stakeholders or have resulted in improved outcomes. Where there is room for ongoing compliance costs to be reduced, APRA has also asked for this information.

 Consultation process

Given the breadth of this consultation, APRA staggered the release of each of the above six topic papers. The intent of this prolonged consultation period was to allow targeted consultations to be undertaken with stakeholders on particular topics. APRA announced that following the release of each topic papers, it would engage with stakeholders via roundtables and workshops as well as holding bilateral meetings to seek informal feedback on each topic. Such informal consultations were scheduled to occur in the four week period following the release of each paper.

Formal written submissions on each topic or the prudential framework as a whole are also encouraged.

However, APRA has also stated that it welcomes feedback on any of the topics at any time during the consultation period.

The context of the prudential framework

In preparing any submission to APRA on this consultation, stakeholders should be conscious of APRA’s opinion that the prudential framework is the minimum baseline for RSE licensee’s operations in relation to these areas. In particular, as APRA Deputy Chairman Helen Rowell stated that “[m]eeting the minimum requirements of APRA’s prudential framework is not enough. APRA continues to encourage RSE licensees to change their mindset from one of legal compliance to aiming to deliver the best possible outcomes for their members.”[4]

To this end, APRA has also been conducting thematic reviews of the practices that are being implemented in accordance with elements of the prudential framework. In particular, in May 2018 APRA released the findings of its review into Board governance[5] and its review into conflicts of interests in light of related party arrangements[6]. In each case, APRA conducted a review of a cross-section of the industry in respect of fund type, size and ownership structure and identified areas for improvement, which it expects regulated entities to consider when implementing the prudential standards.

Next steps and timing

Now that APRA has released each of its six short topic papers, it will complete the stakeholder consultations referred to above.

Written submissions on the prudential framework as a whole and each of the six topics are due to APRA by 26 September 2018.

Once APRA has considered each of the submission received, it anticipates that it will release the findings of its review by early 2019.

Published in LexisNexis Financial Services Newsletter, 2018, Vol. 17 No 6 & 7.

[1] See APRA media release “APRA reviews its superannuation prudential framework” dated 23 May 2018

[2] In particular, pursuant to the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) act 2012 (Cth).

[3] Such as Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives and Prudential Practice Guide SPG 227 Successor Fund Transfers and Wind-ups.

[4] See APRA media release, “APRA releases findings of thematic review of superannuation board governance practices” dated 17 May 2018

[5] ASIC’s letter to RSE licensees dated 17 May 2018 in relation to its Board Governance Thematic Review

[6] ASIC’s letter to RSE licensees dated 29 May 2018 in relation to its Related Party Arrangements Thematic Review