The Australian Prudential Regulation Authority (APRA) has released a package of changes to prudential requirements intended to strengthen the focus of registrable superannuation entity (RSE) licensees on the delivery of quality outcomes for their members. In a statement announcing the changes, APRA deputy Chair Helen Rowell said they 'set a higher bar for RSE licensees by requiring a robust assessment of the outcomes delivered for members, to be reflected in strategic and business planning'.

Key change: Annual outcomes assessment

APRA highlights the introduction of an annual outcomes assessment, which requires RSE licensees to annually benchmark and evaluate their performance in delivering quality outcomes to all members as part of their business planning cycles, as a key change.

• Application: The outcomes assessment applies to 'all types of superannuation products' including defined benefit and legacy products.
• Further changes possible (pending the outcome of the Bill)? APRA comments that the introduction of the outcomes assessment requirement is consistent with the proposed outcomes assessment in legislation currently before parliament: Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 (currently before the senate) and notes that it will review whether any further changes are needed to the prudential standards and guidance to maintain consistency with the Bill if/when it is passed.

Changes: further detail

New Prudential Standard SPS 515 Strategic Planning and Member Outcomes

SPS 515 applies to all registrable superannuation entity (RSE) licensees (RSE licensees) and commences on 1 January 2020. The standard requires that RSE licensees to:

• have strategic objectives that support it in achieving the outcomes it seeks for beneficiaries and the sound and prudent management of the RSE licensee’s business operations;
• maintain a board-approved business plan that sets out the approach for implementation of the RSE licensee’s strategic objectives;
• ensure that decisions to incur significant fund expenditure support the RSE licensee achieving its strategic objectives and that those decisions are monitored against their expected outcomes; and
• as part of the annual review of its business plan, conduct an outcomes assessment and incorporate, where appropriate, any actions arising from that assessment.

New Prudential Practice Guide SPG 515 Strategic and Business Planning

SPG 515 outlines APRA’s requirements for an RSE Licensee to set strategic objectives for its business operations and to maintain a written business plan that articulates the RSE licensee’s approach to achieving them.

Among other things, SPS 515 requires an 'RSE licensee to have a rolling business plan of at least three years duration that is reviewed annually'. APRA states the plan must 'set out details on how the strategic objectives will be achieved' and that the 'the business planning process would be the responsibility of the Board and senior management and any decision-making delegations relating to the business plan would be clearly articulated'.

SPG 515 also contains prudential requirements to ensure that fund expenditure is in the best interests of members and ensure that there is a comprehensive decision making and monitoring process for expenditure that is 'determined by its size or nature to be extraordinary'.

New Prudential Practice Guide SPG 516 Outcomes Assessment

SPG 516 outlines APRA’s requirements for an RSE licensee to annually assess the outcomes provided to members (outcomes assessment) and determine whether these outcomes can be improved into the future. More particularly, it provides guidance in relation to articulating outcomes, designing the outcomes assessment, undertaking the outcomes assessment, interpreting the outcomes of the assessment results and linking them to strategic objectives.

Amendments to Prudential Standard SPS 220 Risk Management

APRA has also amended SPS200 to align it with the cross-industry risk management standard CPS 220. The changes require an RSE licensee to have a management information system (MIS) as a component of its risk management framework. APRA comments that an effective MIS is central to the management of risk and the monitoring of performance and outcomes, including business planning activity outcomes, across an entities’ operations. APRA adds that it expects that for many RSE licensees the addition of the MIS requirement to SPS 220 will not require significant changes to existing systems and processes.

Timeline: new requirements commence 1 January 2020

Revised SPS 220 and new SPS 515 will commence on 1 January 2020 which means that RSE licensee's first outcomes assessment will need to be conducted by 31 December 2020. APRA notes that the timing of an RSE licensee’s review of its business plan will determine when in 2020, the first outcomes assessment will need to be undertaken.

APRA states that it considers the 12 month implementation timeframe to be appropriate given industry's advance notice of the likelihood of the changes.

Preparation required

APRA writes that compliance with SPS 515 on 1 January 2020 will require RSE licences to prepare over the course of 2019. APRA's response paper includes a suggested implementation timeline in relation to this which suggests that starting 1 January 2019 RSEs should:

• conduct a gap analysis of existing practices against business planning and expenditure management requirements in SPS515 and address the gaps identified;
• design the outcomes assessment and discuss it with APRA; and
• plan to undertake their first outcomes assessments in conjunction with their 2020 annual reviews of their business plans.

APRA's expectations during the first year

APRA writes that the outcomes assessment represents a new prudential requirement and 'that there will be a period of learning for the industry' in implementing the changes. Consequently, in the first year APRA states that supervisors will look for 'reasonable efforts by RSE licensees to conduct the assessment in a comprehensive way and align it with their business planning processes'. Having said this, APRA states that it expects 'some preliminary assessment of outcomes for all products and members', though the regulator notes that for some RSE licensees, segmentation in the first year may be at a relatively high level and may have a primary focus on MySuper members due to greater availability of MySuper data.

Other proposed changes deferred?

• Changes to make it easier to opt out of life insurance: APRA states that it has determined to defer proposed changes to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) until 'the final form of any related legislative changes arising out of the government's Protecting Your Super package in the 2018-2019 Budget are known' as the reforms are likely to require 'extensive changes' to SPS 250. According to the response paper, industry stakeholders were generally supportive of the proposal to make a minor amendment to SPS 250 regarding implementation of straightforward insurance opt out processes. APRA adds that it will monitor opt-out processes and changes in insurance offerings following industry’s adoption of the Code of Practice and assess whether industry developments should be reflected in any changes to SPS 250 and SPG 250.
• Changes to reporting proposals (as outlined in the December discussion paper): APRA states that it will be conducting further work to assess the scope and timeframes for amendments to the reporting collection. APRA adds that this will take into account the outcomes of APRA’s post-implementation review of the prudential framework, the Productivity Commission’s final report on its review of superannuation (due December 2018), and the Royal Commission’s final report (due February 2019).

Media response

The AFR comments that the move by APRA to act to strengthen requirements, without waiting for the Bill (Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017) to be passed, is further evidence of the shift towards a tougher approach on the part of the regulator. It's also suggested that APRA's acting ahead of the passage of the Bill is a positive development for members, given the lack of progress on a number of pending superannuation reforms.

The Australian suggests that the more stringent accountability requirements could 'hasten mergers' between smaller and poorly performing funds. The article adds that the passage of the Bill which would grant APRA powers to direct fund trustees to act or face court action, would give 'teeth' to the reforms.