Finance watchdog to guard super

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.