FOR the first time, the $1.3 trillion superannuation industry will face the same level of oversight as banks and insurers under proposals that will dramatically bolster the power of the top finance regulator.
Under proposed rules released yesterday by the Australian Prudential Regulation Authority, super funds would be required to lift governance and investment standards.
The move is aimed at improving confidence in the superannuation industry, when volatile global markets have produced shrinking returns, and follow recommendations from the Gillard government's "stronger super" reforms.
Among key changes, superannuation funds would be required to disclose the remuneration of executives and build up a pool of cash reserves to protect members from operational problems.
While APRA has oversight of superannuation funds, it lacks the legal framework known as prudential standards to keep rules up to date with changes to the industry or to force some poorer-performing funds to overhaul their business.
This is in contrast to the banking and insurance industries, where the regulator has a wider range of legal powers to investigate problems or overhaul businesses.
APRA deputy chairman Ross Jones said the proposed prudential standards would significantly strengthen the superannuation system.
"APRA has successfully established prudential standards in banking and insurance . . . and the establishment of such standards in superannuation will provide clear benefits to the superannuation industry as a whole and to its members," he said.
But he stressed that the new prudential standards would not diminish the fact that the primary responsibility for the management of superannuation funds rests with the trustees.
Other changes would shift the way super funds deal with risk management.
This would see funds move from documenting risk strategies and planning to actively outlining the risk appetite of a fund and having dedicated risk-management staff.
Funds would also be required to provide members with return targets and benchmarks for funds.
Despite the changes, the Australian Institute of Superannuation Trustees (AIST) said the regulator appeared to be taking a flexible approach to the new rules. Many trustees had feared APRA would take a "one-size-fits-all" approach when it came to putting aside a minimum level of assets to protect against operational risks.
Under the proposals, the pool would be calculated as 0.25 per cent of a fund's investment assets. APRA's proposal "not only reduces compliance costs but it recognises that super funds come in all shapes and sizes", said AIST chief executive Fiona Reynolds. "Where funds do have to make changes to meet these standards, we believe these changes will be in the best interests of their members."
APRA will consult with the industry over the next three months and finalise prudential rules mid-next year.
Frequently Asked Questions about this Article…
What are APRA's proposed prudential standards for superannuation and why do they matter to everyday investors?
APRA has proposed new prudential standards that would bring the $1.3 trillion superannuation industry closer to the same level of oversight that banks and insurers face. The rules aim to lift governance and investment standards, improve transparency and boost confidence after a period of volatile global markets and shrinking returns. For everyday investors, that means stronger protections, clearer reporting and more consistent oversight of how funds are run.
How will the APRA proposed rules affect transparency about executive pay in super funds?
Under the proposals, super funds would be required to disclose the remuneration of executives. That increased transparency is designed to help members see how their funds are being run and whether executive pay aligns with fund performance and member interests.
What is the new cash reserve requirement for super funds and how is it calculated?
APRA proposes that super funds build a pool of cash reserves to protect members from operational problems. The pool would be calculated as 0.25% of a fund's investment assets, a formula APRA says balances protection with recognition that funds vary in size and structure.
Will APRA's new prudential standards mean APRA runs or replaces super fund trustees?
No. APRA's proposed prudential standards give the regulator stronger legal powers to set rules and enforce standards, but they do not remove the primary responsibility for managing super funds from trustees. Trustees will still be responsible for running their funds.
How will risk management change for super funds under the APRA proposals?
The proposals shift funds from simply documenting risk strategies to actively defining a fund's risk appetite and maintaining dedicated risk‑management staff. This means more proactive and structured risk oversight rather than passive planning documents.
Will super funds have to set and report return targets and benchmarks for members?
Yes. APRA's proposals require funds to provide members with return targets and benchmarks, giving investors clearer expectations about performance and an easier way to compare funds.
How have industry groups responded to APRA's proposed rules for superannuation?
The Australian Institute of Superannuation Trustees (AIST) said APRA appears to be taking a flexible approach rather than a one‑size‑fits‑all rule. AIST chief executive Fiona Reynolds noted the 0.25% reserve proposal reduces compliance costs and recognises differences between funds, and said required changes should be in members' best interests.
What is the consultation and implementation timeline for the new superannuation prudential standards?
APRA will consult with the industry over the next three months on the proposed rules and plans to finalise the prudential standards around mid‑next year.
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