APRA’s superannuation oversight found
wanting
Mr Byers defended using different levels of supervision for similarly risky trustees.
- The Australian
- 4:03PM November 23, 2016
The prudential regulator’s supervision of the $1.2 trillion superannuation sector has been found to be wanting in a concerning number of cases, following a wideranging review by the Australian National Audit Office.
The Australian Prudential Regulation Authority has pledged to overhaul its supervision practices in four areas after the audit found problems with record keeping, inconsistent supervisory practices and tardy review completions. The report also said APRA had varied levels of supervision for similarly-risky superannuation bodies while its higher risk trustees were not consistently subject to more intense supervision
APRA, the body responsible for oversight of the super, insurance and banking sectors, was found to have recorded just 4 per cent of its proposed regulatory actions it ordered through prudential reviews — a move the Audit Office said impaired APRA’s ability to monitor its own effectiveness.
The critical report comes at a tense time for the relationship between the super industry and APRA, with close regulatory scrutiny of superannuation life insurance policies and procedures and pressure from the regulator for small funds suffering outflows to merge with others or face a forced roll-up.
And although the government’s controversial superannuation reforms were passed into law on Wednesday, introducing a yearly $100,000 after-tax contribution cap and a $1.6m tax-free pension limit, uncertainty surrounding the reforms had already left personal nest egg contributions $1.5 billion lower over the last year. The pressure on flows comes at the same time as a big jump in the amount of retirees starting to draw down on their accounts triggered a near-20 per cent fall in net contributions.
The Audit Office review found more than half of the supervision activities conducted over a three-year period were “overdue” and a large proportion of prudential reviews “were not recorded electronically in line with internal guidance”.
The report shows APRA had a habit of completing multiple quarterly risk reviews for a single trustee on the same day — a behaviour known as “clustering” -- or copied and pasted previously completed super trustee reviews “with no change”.
“The worst instance of clustering was seven reviews being completed on the same day,” the Audit Office said, indicating APRA had not completed a quarterly risk review for the trustee in question for almost two years.
The Audit Office found that of the 138 trustees subjected to APRA supervisory action as of March 2016, nearly half — 66 trustees — were subject to an “oversight” stance, which requires more frequent and targeted prudential reviews, special investigations and further regulatory action. Three trustees were classified as “mandated improvement” which includes the use of enforceable undertakings.
The review also identified “shortcomings” with APRA’s record keeping, such that “key supervision activity outcomes were not recorded” and that documents were not stored electronically — inconsistent with government policy requiring agencies to manage information in digital formats from the start of 2016.
Following the review, APRA has agreed to be more consistent in its supervision of trustees and improve the recording of actions taken, along with introducing electronic record keeping. APRA will also independently review its supervision.
In a letter to the Audit Office, APRA chairman Wayne Byers said the recommendations in the report aligned with plans APRA had already outlined in its recent four-year corporate plan. Mr Byers also defended using different levels of supervision for similarly risky trustees.
“APRA considers that effective, risk-based supervision involves identifying risks at an idiosyncratic, industry and financial system level,” Mr Byers said.
“This requires APRA to allocate resources from a risk perspective to not only those institutions that present a higher risk individually, but also to those that present a higher risk to the financial system in the event they encounter financial difficulty. This will not be achieved by a simple, linear approach of undertaking a certain number of activities per institutions.”
Since 2009 only one APRA-regulated trustee has collapsed — Trio Capital — and a 2013 review by Treasury found APRA carried out its related responsibilities appropriately. A separate APRA review pinned the Trio Capital failure on poor investment governance, badly managed investment conflicts of interests and unmitigated fraud risk.