Superannuation industry could be in for a sea change, but how deep will APRA dive?

The reform package - Stronger Super - prepared by a consultative committee chaired by former Future Fund general manager Paul Costello includes setting up a new simple default fund, MySuper, back-office reforms known as SuperStream, and beefing up the powers of the Australian Prudential Regulation Authority to enable it to better monitor and protect the country's growing pool of retirement savings.

The measures are believed to include changing the capital requirements of super funds from a flat $5 million to a risk-weighted requirement. The package is also expected to give APRA the power to set standards in superannuation, including creating some statutory cost categories that could be released to the public for comparison between super funds.

This is a powerful weapon for the deputy chairman of APRA, Ross Jones, who is responsible for overseeing $1.3 trillion in retirement savings. It means the authority would have the power to implement standards that are enforceable as opposed to the current system where any changes have to be passed through Parliament.

Jones would, if required, be able to improve transparency by calling for greater disclosure from super funds. He could do this by introducing rules that require funds to release information on fees, returns and costs, to allow industry benchmarking.

He could also introduce standards that require funds to provide greater detail on the performance and structure of their investments so members can see what they are buying and selling.

Some sections of the industry fear that increased powers for the regulator could result in more intrusive monitoring. That would, of course, depend on APRA and whether it has the stomach to implement these powers to improve the transparency of an industry that has become increasingly opaque over the years.

With super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, more needs to be done to direct the spotlight on governance, board composition, conflicts of interest and the standard of education of board and trustee members.

But APRA will only be able to go so far. The consultative committee was not allowed to touch on key governance issues such as transparency around trustee payments or the composition of super boards, as these issues were excluded from the terms of reference.

Super funds are not obliged by law to disclose detailed investment outcomes or the salaries of senior executives or board members. Nor are they required to provide members with a full set of audited accounts.

In most cases, members do not have control over those who manage their money neither do they elect the managers or trustees. This has created a perception that industry fund boards are retirement homes for business leaders and union officials.

Nevertheless, changes to the capital requirements and new regulatory powers have the potential to turn the industry upside down.

Super funds are required to hold $5 million in capital, irrespective of their size. This figure was set in 1993 when the industry was worth $126 billion and super funds were a fraction of their current size.

The Costello report is expected to follow through on recommendations under the Cooper Review to introduce a risk-weighted capital model. This will be a bonus for retail funds such as AMP, which have a life insurance business and therefore have higher capital requirements.

AMP has $159 billion in assets under management. For the six months to June 30, its regulatory capital resources stood at $2.1 billion, a far cry from the $5 million required by industry funds.

Changes to capital requirements will have a significant impact on the industry and will need to be introduced gradually. For example, if the reforms require super funds to hold between 0.05 per cent and 1 per cent in risk-weighted capital, a $40 billion fund will need to raise its capital from $5 million to between $200 million and $400 million.

The purpose of holding sufficient capital is to reduce risks associated with a mismatch between assets and liabilities. For instance, if a fund has too big a weighting to illiquid assets and its member profile is skewed towards retirement, it could present issues when they wish to withdraw their money.

It was a far-sighted decision to set up a super guarantee scheme in 1991 to force people to save for retirement. But two decades on, the system is outdated and in desperate need of reform. Hopefully, the Costello report will give APRA the power to make some headway in the reform stakes. The ball will be in APRA's court. If it fails to deliver, come the next federal election the Coalition will.