The deputy chair of the Australian Prudential Regulation Authority (APRA), Margaret Cole, has acknowledged that the super industry has made “significant strides” in strengthening governance, improving its practices, and addressing performance issues in recent years.
But in a speech to the AFR Super & Wealth Summit on Tuesday, Ms Cole identified a number of shortcomings which APRA expects super trustees to address “with urgency”.
Specifically, she pinpointed operational risk, financial resilience, and how trustees plan to assist a “tidal wave” of members approaching retirement as being major issues.
“Trustees will need to address – with urgency – critical shortcomings in every stage of the superannuation life cycle to keep pace with the impending demands of the vast and expanding system. It’s a huge responsibility,” Ms Cole said.
APRA will soon write to trustees with a forward plan of the regulator’s priorities, which Ms Cole said are centred around the key challenges facing the super industry at present.
These include addressing system-wide risks, with APRA recognising that an inadequate response by trustees to market disruptions and liquidity events “could have a significant adverse impact on the financial system and member outcomes”, according to Ms Cole.
The prudential regulator is doubling down on trustees’ approach to operational risk, Ms Cole said, with a new prudential standard set to take effect from 2025.
Trustees, as well as banks and insurers, will be required to identify and manage risks in their end-to-end processes, deliver critical operations such as investment management and fund administration during severe disruptions, and manage the risks associated with outsourcing.
Ms Cole also called for greater attention to cyber risk, particularly after a review by APRA highlighted common shortfalls in the cyber security practices of financial services institutions.
“Let me be clear; APRA will not shy away from taking action against entities that have breached our requirements,” she added.
Furthermore, the APRA deputy chair said that one of the most pressing priorities for the industry is addressing shortcomings in the approach to the retirement income phase.
“For an industry that exists to support Australians in retirement, there is a surprising lack of readiness to meet the needs of the rising tide of retirees that are beginning to draw on their superannuation,” Ms Cole said.
A recent review by APRA into the implementation of the retirement income covenant identified a “lack of progress and insufficient urgency” among the trustees examined.
“When we published the review in July, we made it clear that we expected all trustees to reflect upon their retirement income strategies,” Ms Cole said in her speech on Tuesday.
“A process to learn more about what actions trustees have taken to address gaps in their approach will be launched soon. We want to see a shift in mindset by trustees to embrace the retirement phase as an integral part of members’ experience of superannuation.”
While flagging sharper supervision and tighter regulation in the future, Ms Cole said that the prudential regulator recognises industry concerns regarding “over-regulation”.
“Through initiatives such as modernising the prudential architecture, APRA is working to make the regulatory framework clearer, simpler, and more adaptable for all APRA-regulated industries. We are also taking a proportionate approach to reduce regulatory burden on smaller, less complex entities,” she said.
“But the reality is that the Australian community expects the super industry to be held to account, so in considering how we can reduce burden there is always a balance to be struck.
“Super is an industry that has stewardship of trillions of dollars which it receives on a mandated basis; it has a large proportion of disengaged fund members whose financial interests need to be protected; and its fund members should reasonably expect that their superannuation savings will be safe and managed in their best financial interests, and that the service they receive will be commensurate with their needs.”
In a separate speech on Tuesday, Minister for Financial Services Stephen Jones lashed out at super funds over a “catalogue of poor customer experiences” that have emerged over the past year.
