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APRA rules out expedient ‘race to bottom’ on super fees

Mike Taylor2 August 2022
Businessmen pointing to smaller and smaller version

Amid concerns that superannuation funds have cut fees to help them pass the superannuation performance test, the Australian Prudential Regulation Authority (APRA) is now stating it does not believe ‘a race to be the bottom’ in operating costs is appropriate.

The regulator is making clear that it does not see fund cost-cutting as an acceptable approach.

Barely a week after news that APRA chairman, Wayne Byres is standing down and before Treasury even starts its review of the superannuation performance test methodology the regulator is proposing changes to superannuation prudential standards to “update and sharpen” strategic planning and member outcomes in superannuation.

The regulator is also stating that intends making “connected enhancements to the superannuation prudential framework, focused on supporting the efficient and prudent transfers of members to other products and RSEs, and the effective exit of RSE licensees from the industry”.

In releasing the discussion document around the proposed new standards, APRA member, Margaret Cole said that while the regulator had seen clear evidence that SPS 515 has contributed to greater efficiency in the industry, increased consolidation and better outcomes for members, there is still more to do”.

“To continue to meet the needs and expectations of members, RSE [superannuation fund] licensees must manage their expenditure to enable the required investment to support provision of their products and member services,” the APRA discussion paper said.

“As such, APRA does not consider that a ‘race to the bottom’ in operating costs is appropriate if improved outcomes for members are to be sustained over the long term. RSE licensees must be rigorous in reviewing their strategic and business plans and pay particular attention to their operational efficiency and expenditure management.”

“In doing so, an RSE licensee will need to consider the sustainability of its operating model, including setting appropriate fee structures to cover reasonable operating expenses, while also appropriately managing the tension with promoting the financial interests of members to deliver better outcomes over the longer term.”

Looking at proposed enhancements, the discussion paper states: “APRA intends to make connected enhancements to the superannuation prudential framework, focused on supporting efficient and prudent transfers of members to other products and RSEs, and the effective exit of RSE licensees from the industry. These, and the relationship with existing requirements and guidance, are outlined below.

“An RSE licensee’s BPR is expected to make clear where an RSE licensee needs to take action to improve outcomes for members. Such remediation action may be to change product features, adjust investment strategies or change fee structures. APRA also expects RSE licensees to consider where changes to the business operations are necessary to improve outcomes for members. This may include transferring members out of an RSE, which can, in some cases, result in the RSE licensee exiting the industry.”

Mike Taylor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

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Wildcat
1 year ago

What did they think would happen?

Gee life must be easy when your snout is in the government tax payer funded trough and you don’t have to stand on your own feet in an over regulated, strangulation by regulation world administered by public servants who have no idea how the real world works.

I remain bemused
1 year ago

Super fund consolidation is a messy business. Funds fail the Heatmap performance test then show up in the Top 10 for returns the next year. APRA aims at $60bn behemoth funds but the differences at member account level post consolidation are close to negligible. The cost to the industry generally is enormous. What is the cost associated with a huge fund merger? And what is that cost per member when spread over the fund membership? My guess is that some of those costs would exceed calculated benefits.

APRA’s own guidance for sustainability guarantees continued industry fund dominance – with employment mandates accounting for 2 of the three primary objectives.

Not only are the benefits questionable, but the process is highly suspect. The member of a fund failing the performance test is told their fund is deficient and they should consider others. Yet the member is then completely in the dark as to how to decide between funds. It comes down to the most recently remembered fund name or the best advertised or the recommendation of friends, family or work colleagues. There is very little authoritative help in deciding between funds. Yet the transfer process is so simple that it is arguably too simple. Benefits lost and risk/return profiles completely ignored.

Fees were once the No.1 priority. Everything was about fees. This or that fund being the cheapest. Yet anyone in the financial industry is fully aware of the variance in fees available even within the same fund. Yet super fund choice was being driven by superficial fee comparisons. The misinformation and marketing cloaking fee realities has been amazing. Now the public is being told fees aren’t that big a deal, and it’s about returns.

Returns were being heralded as the primary reason for moving from one fund to another. Yet we all know past performance cannot guarantee future returns. And now the last 12 month returns (which are obviously rather awful) are being played down in favour of longer term returns. That’s a very old trick in the world of money.

Rather than develop a nuanced approach to the superannuation sector, laws and regulation have created a soup of misinformation that marketers can use to their advantage. Legislative and regulatory structures and change are tied to bias and ideology and dominated by pressure groups of one type or another.

Here’s a fun test for anyone who thinks my commentary involves ignorance of my own financial planner interests.. How about regulators writing an official example note showing how they would help a member decide between the 5 largest super funds? Or even simply deciding between 2? Say, Hostplus and AustralianSuper. How should a person decide? If regulators can’t or won’t do it then how can the individual on the street be expected to do it?

Planner bias and business models are a completely different question. Planner regulation and legislation ensures the dominance of groups tied to products in one form or another, which further blocks an important avenue for help on super questions.

Think I’ll go make myself another coffee.