FOR the first time the nation's $1.3 trillion superannuation industry will face the same level of supervision as banks and insurers under proposals that will dramatically bolster the power of the top finance regulator.
Under a swathe of proposed rules released yesterday by the Australian Prudential Regulation Authority, super funds will have to lift governance and investment standards.
The move is aimed at improving confidence in the superannuation industry when volatile global markets have seen returns shrink and follow from recommendations coming out of the Gillard Government's Stronger Super reforms.
Among key changes, superannuation funds will have to disclose the executives' remuneration and build up cash reserves to protect members from operational problems.
While APRA currently has oversight of superannuation funds, it was lacking 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 industry where the regulator has a much wider range of legal powers to investigate problems or overhaul businesses.
APRA Deputy Chairman, Ross Jones, said yesterday the proposed prudential standards will strengthen the superannuation system.
"APRA has successfully established prudential standards in banking and insurance for many years, and the establishment of such standards in superannuation will provide clear benefits to the superannuation industry as a whole and to its members," Mr Jones said.
However, he stressed the new prudential standards in superannuation will not diminish the fact that the primary responsibility for management of superannuation funds rests with the trustees.
Other key changes will see a shift in the way super funds deal with risk management. This will see funds move from documenting risk strategies and planning to actively outlining risk appetite of a fund and having dedicated risk management staff. Funds will also be required to provide members with return targets and benchmark for funds.
Despite the changes, the Australian Institute of Superannuation Trustees said the regulator appeared to be taking a flexile 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 will 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 Australian Institute of Superannuation Trustees chief executive, Fiona Reynolds.
"Where funds do have to make changes to meet these standards, we believe these changes will be in best interests of their members," she said.
APRA will consult 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 funds?
APRA (the Australian Prudential Regulation Authority) has proposed new prudential standards that bring the $1.3 trillion superannuation industry closer to the same level of supervision as banks and insurers. The proposals require higher governance and investment standards, greater transparency, and legal powers to ensure funds can be held to consistent rules.
How will the proposed rules change governance and transparency in my super fund?
Under the proposals super funds would need to disclose executives' remuneration, set clear return targets and benchmarks for members, and strengthen governance processes. Trustees would be expected to be more open about how decisions are made and how performance is measured.
Will the new prudential rules help protect members from operational problems at super funds?
Yes. One key change is a requirement for funds to build up cash reserves to protect members against operational risks. APRA has proposed calculating the reserve pool as 0.25% of a fund's investment assets to help cover unexpected operational issues.
Does APRA's proposal take responsibility away from super fund trustees?
No. APRA’s Deputy Chairman Ross Jones stressed the new standards will strengthen the system but will not diminish the primary responsibility of trustees. Trustees remain responsible for the management of their funds.
How will risk management change for super funds under these proposals?
Funds will shift from simply documenting risk strategies to actively outlining a fund’s risk appetite, employing dedicated risk management staff, and integrating risk practices into decision making. The aim is more proactive and operational risk oversight.
Will small and large super funds be treated the same under the new rules?
APRA appears to be taking a flexible approach rather than a one-size-fits-all solution. The proposed reserve pool is set at 0.25% of investment assets, a measure the Australian Institute of Superannuation Trustees says reduces compliance costs and recognises that funds come in different shapes and sizes.
What benefits should everyday investors expect from these prudential changes?
The proposals aim to boost confidence in the superannuation system by strengthening governance, improving risk controls, increasing transparency (like pay disclosure and return benchmarks), and requiring operational reserves—measures intended to better protect members' savings.
When will the proposed prudential rules be finalised and how will industry feedback be handled?
APRA will consult the superannuation industry over the next three months and plans to finalise the prudential rules by mid next year. That consultation period is the time industry participants can provide feedback and input on the proposals.
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