Daniel Di Stefano
Asset Servicing Product Manager, Asia Pacific
Though superannuation funds (or “supers”) have constantly witnessed a changing regulatory landscape, the last few years have been exceptional. In recent times, supers have faced intense market volatility, driven by resurgent inflation and rising interest rates, which has made compliance even more challenging.
A major catalyst for these reforms were two government enquiries, which generated several recommendations that are currently being enacted into law. First, in late 2014, the Australian government published the Murray report,1 which focused on creating a resilient financial system. Then came the Hayne Royal Commission’s final report2 in early 2019 to address misconduct in the banking, superannuation and financial services industry.
In this article, we explore some of the developments that supers should be aware of and outline the key trends to consider in the years to come.
Greater transparency around retirement income
The Retirement Income Covenant is a significant driver of change in the superannuation industry. It reflects the Australian Prudential Regulation Authority’s (APRA) aim to ensure that funds effectively manage risks covering investment performance, inflation and longevity for members nearing retirement.
Enacted in July 2022 to improve financial outcomes for Australian retirees, the covenant requires trustees to document, implement and review the fund’s retirement income strategy, and to monitor its performance. The covenant also requires trustees to publish this data on the fund’s website.
A robust governance framework
The revised prudential standard, SPS 530, relating to investment governance, came into force in 2023 with implications around asset allocation. It requires that supers run a robust governance framework to select, manage and monitor investments that are appropriate to the fund’s size and complexity, and has a significant impact on investing in private assets.
As a part of the new standard, supers must scrutinize private asset valuation practices. This includes gathering data from various sources, which makes taking informed investment decisions a complex and onerous task. To meet these requirements, funds are demanding more information related to underlying investments, and are increasingly focusing more on stress testing.
Integrating climate risk into strategic planning
Societal priorities around climate risk and the energy transition have not passed by Australia’s super funds. Specific requirements for funds to make ESG disclosures have been limited to date, but that is changing fast. APRA’s Climate Change Financial Risks (CPG 229) guide suggested, for example, that they should consider voluntary disclosures in line with the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), a global climate-related reporting framework.
Following an industry survey completed last year, APRA found broad alignment with CPG 229 among supers, but also flagged that integrating climate risk into strategic planning would require more work.
To support increased transparency, APRA is kicking off phase two and three of its Superannuation Data Transformation Program, which is expected to run through 2025.3
The program broadens data collection across investment areas such as MySuper pension investment funds. Trustees should ensure adequate resources are committed to support this initiative.
Navigating change around YFYS
Another key development for the industry is the Australian Treasury’s review of the Your Future Your Super (YFYS) annual performance test.
The test aims to increase superannuation fund member engagement, reduce fees, increase performance and hold trustees accountable for their decisions. However, the Treasury is evaluating any significant unintended consequences for MySuper products. It will assess how to apply the test to other superannuation products.
The extension of the test beyond MySuper products will be paused for 12 months, as the review takes place. Throughout 2023, it is expected that the YFYS legislation will continue to put pressure on the sector, resulting in further consolidation.
Enhanced operational resilience
Superannuation funds are increasingly expected to account for supervisory considerations, following APRA’s stated goal of making operational resilience a priority, particularly around cybersecurity.
The introduction of APRA's CPS 234 Information Security prudential standard in July 20194 has significantly changed how funds manage information security risks. The CPS 230 Operational Risk Management standard, due to start in January 2024,5 requires trustees to effectively identify and manage operational risks.
Stronger risk frameworks
Implementing robust operational risk frameworks will be a prerequisite to adopting the technology platforms that make it easier for superannuation funds to comply with the growing list of regulatory obligations.
Digitization will help generate data that super funds can leverage to make informed investment decisions. As digital transformation prevails across the financial services industry, superannuation funds will benefit from being able to view their data as a valuable asset to achieve better business outcomes.
These regulatory changes are causing the industry to consolidate even as its total assets under management increase – a move that is being encouraged by regulators. Nonetheless, the end result of these reforms will be more resilient supers, which can confidently deliver positive outcomes for retirees.