APRA aims for transparency on superannuation funds spending

The Australian 12:00am December 14, 2017

Michael Roddan

The prudential regulator will publish data revealing how superannuation funds spend member savings on controversial advertising and investments, and how fee revenue charged to members is translated into profit and dividends paid back to large wealth managers and banks.

The Australian Prudential Regulation Authority yesterday unveiled a consultation package for new rules designed to bring more transparency to how funds spend money, and to increase pressure on underperforming trustees that lack proper business strategies.

The prudential standards have been in the pipeline since August, but were held over due to the passage of the federal government’s super reforms, which had to be withdrawn from parliament last week after the legislation failed to gain the support of crossbenchers.

While there was some crossover between Financial Services Minister Kelly O’Dwyer’s legislation and the new prudential standard, APRA’s rules will also force funds to make it easier for members to cancel life insurance and to defend high-fee products that don’t offer outsized benefits.

APRA will require super funds to annually assess the outcomes provided for members, after the regulator found several areas of weakness in the $2.5 trillion sector, such as business plans that were broad and without time­frames or budgets, unsound projects and activities and a lack of planning and contingency strat­egies.

“Every super fund member ­deserves confidence their fund is delivering quality, value-for-money outcomes,” APRA member Helen Rowell said.

She said the proposals would help funds “lift their standards for the long term” and “go beyond the minimum legislative requirements” by focusing on member outcomes.

Fund expenditure has been a focus for the government as it ­attempts to break the union-­employer equal representation model in the $500 billion industry fund sector.

The Liberal Party has claimed $50 million has been paid by industry funds to unions over the past decade. Industry funds say the majority of that cash is $40,000-$50,000 in annual director fees to appointed board members, who gave the money back to their union as standard practice and did not take it as income. Other cash that went to unions was for marketing, including sponsorship of conferences.

Some advertising by industry funds has also drawn criticism for its political nature and its cost. Industry fund investments into news website The New Daily and challenger lender ME Bank, which is yet to pay a dividend to any funds, have also drawn scrutiny.

The spending habits of bank-owned retail funds has also been examined, with dividends worth hundreds of millions of dollars paid back to parent organisations out of profits from managing member savings. Both sides of the super sector will face tougher scrutiny when APRA’s rules come into effect in early 2019, after a period of consultation.

The regulator said its proposals were independent of — but aligned with — the laws before parliament. The laws will enable APRA to get more comprehensive data relating to non-investment costs that allow a “look-through” to how funds spent money and the ultimate destination of the cash.

Industry Super Australia public affairs director Matthew Linden, who fought Ms O’Dwyer’s legislation, welcomed APRA’s proposals but said the measures must apply equally “irrespective of the product or sector”.

ISA will be pushing APRA to standardise its outcomes tests for the performance of funds and investment options, which the regulator has proposed leaving to the discretion of trustees.

Currently, data on fund expenditure is categorised into investment, administration and “other”. APRA is attempting to bring more transparency to the latter category and force funds to explain and justify their spending decisions.

APRA said products with higher-than-average costs would need to demonstrate better-than-average outcomes to justify their cost bases. The regulator is expecting higher fees to result in greater levels of service, which also must be backed up by customer demand. Business plans will also need to justify the basis for the level of fees charged to customers and how revenue is shared between profit, dividends and reserves.