Super funds falling short on financial contingency planning

Superannuation funds need to have the ability to do more than simply initiate a successor fund transfer (SFT) when they run into trouble, according to the Australian Prudential Regulation Authority (APRA).

The regulator has reviewed 16 superannuation fund licensees and found shortcomings in their approach to financial contingency planning, particularly exiting and recovering from adverse situations.

“A commonly observed area of weakness amongst the 16 RSE licensees was inadequate preparatory measures to streamline execution of limited recovery or exit actions,” APRA said.

“APRA acknowledges that some RSE licensees may have a limited suite of credible recovery actions for restoring financial resilience due to their ownership structure, business model, and/or access to external capital.

“It was also observed that a common (and sometimes only) exit action is a successor fund transfer. APRA recommends that RSE licensees further enhance proactive measures and uplift capability to reduce the execution risk of limited recovery or exit actions.”

“Additionally, some of the reviewed R&E plans and the survey responses included litigation or insurance claims proceeds as potential recovery options. Since these options are contingent, and often time consuming, they cannot be credibly relied upon to achieve timely recovery particularly during the period of stress. Therefore, it is recommended that these options not be included in R&E plans.”

APRA told the superannuation funds that, while some RSE licensees are well progressed in meeting the minimum requirements of CPS 190, the thematic review identified common areas of weakness.

Improvements are needed across:

1. Early warning indicators and trigger levels in the trigger framework should be more relevant to RSE licensees’ operating environment and risk profiles;
2. Enhanced preparatory measures should be considered for recovery and exit options, together with an uplift in capability to reduce execution risk; and
3. Proactive communication strategies should be implemented to support the effective execution of recovery and exit plans particularly in periods of stress.

The review highlights opportunities for improvement and the immediate need for RSE licensees to further invest in building the structures and capabilities to meet the requirements of CPS 190 by 1 January 2025.