Australia's $1.3 trillion superannuation industry is facing its biggest overhaul in two decades, with the imminent release of an issues paper set to recommend greater powers be given to the financial services regulator and stiffer capital requirements for super funds.
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.
Frequently Asked Questions about this Article…
What is the Stronger Super reform package and why does it matter to everyday superannuation investors?
The Stronger Super package is a set of reforms (prepared by a committee chaired by Paul Costello) aimed at modernising Australia’s $1.3 trillion superannuation system. It includes a simple default product called MySuper, back‑office improvements known as SuperStream, and proposals to give APRA stronger regulatory powers and tougher capital rules for super funds. For everyday investors, these changes are intended to improve transparency, create simpler default options, and reduce risks in big funds so your retirement savings are better protected.
How could giving APRA more powers improve transparency in super funds?
The proposals would allow the Australian Prudential Regulation Authority (APRA) to set enforceable standards for super funds — for example requiring public disclosure of fees, returns, costs and certain cost categories for easier comparison. APRA (and deputy chairman Ross Jones, who oversees the $1.3 trillion pool) could also require more detail on investment performance and structure so members can better understand what their fund is buying and selling.
What change is being proposed for super fund capital requirements and what does 'risk‑weighted capital' mean?
Instead of the current flat $5 million capital floor (set in 1993), the committee is expected to recommend a risk‑weighted capital model. That means funds would hold capital according to the risks in their investments and member profile — possibly a range like 0.05% to 1% of assets. The aim is to reduce risks from asset‑liability mismatches (for example, holding too many illiquid assets when many members are retiring).
Will higher capital requirements affect large retail funds differently from industry funds?
Yes. A risk‑weighted capital model could favour retail funds that already carry higher regulatory capital because of related businesses (like life insurance). The article notes AMP as an example: it has about $159 billion in assets under management and held $2.1 billion in regulatory capital for the six months to June 30 — far above the current $5 million minimum required of many industry funds.
Are super funds currently required to disclose executive pay, trustee payments or full audited accounts to members?
No. The article highlights that super funds are not obliged by law to disclose detailed investment outcomes, senior executive or board salaries, trustee payments, or to provide members with a full set of audited accounts. The consultative committee was also not allowed to change rules around trustee payments or board composition as those issues were excluded from its terms of reference.
What are MySuper and SuperStream and how will they benefit members?
MySuper is proposed as a simple default super product designed for members who don’t choose an investment option, making default choices easier to compare. SuperStream is a set of back‑office reforms to streamline administration, payments and data handling across the industry. Together they aim to simplify default choices and reduce friction and costs for members.
Could APRA require super funds to provide more detailed information on investment performance and costs?
Yes. Under the proposed reforms APRA could introduce rules requiring funds to release more detailed information on fees, returns, costs and the composition or structure of investments. That would make benchmarking between funds easier and help members see what they’re paying for and what their fund holds.
What is the timeline and next step for the Costello committee recommendations?
The article says an issues paper from the Costello committee was imminent and is expected to recommend giving APRA broader powers and moving to a risk‑weighted capital model. Any changes to capital requirements would likely be phased in gradually. After the committee’s recommendations, it will be up to APRA and policymakers to decide how and when to implement the reforms.
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