Superannuation funds look to ease reform burden

The wave of regulatory reform surfed by the previous Government may not yet have run its course, but now may be the time to tread water and scan the horizon, writes Damon Taylor. 

With 1 January 2014 just around the corner, many within the super industry will be taking stock of where they are positioned with respect to regulatory reform. Indeed with much of the MySuper work now behind them, industry executives’ attention must turn to what remains. 

Between Product Dashboard, portfolio holdings disclosure requirements and the contributions aspect of SuperStream, there is still plenty left to do and for Damian Hill, chief executive officer of REST, the challenge lies in remaining focused. 

“In my almost 30 years in the industry, this has been the time of the most rapid and intensive regulatory reform,” he said. “Yes, there have been some big ones in the past but I’d say this has beaten those by some margin. 

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“When you take FOFA (the Future of Financial Advice reforms) and SuperStream and Stronger Super and even broader regulatory reform for some of the conglomerates out there, it’s been a massive exercise,” Hill explained.

“And pleasingly, after a lot of effort and a lot of angst, there have been plenty of successes. 

“But we also can’t lose sight of the fact that there are still key aspects of regulatory reform to come.” 

Offering a similar stock-take, Tom Garcia, CEO of the Australian Institute of Superannuation Trustees (AIST), said that as funds closed out 2013 and prepared for the year ahead, the key challenges would be SuperStream and Australian Prudential Regulation Authority (APRA) reporting. 

“Most funds, certainly with respect to MySuper, are very much underway,” he said.

“Anyone who wants a MySuper product would either have it or have it with APRA because if they don’t, I think it would be virtually impossible for them to get it through now. 

“SuperStream, on the other hand, is something that a lot of funds are still coming to terms with but there’s also been a huge amount of work done with the ATO (the Australian Taxation Office) and all of the industry bodies together on gateways, on rollovers and then the next big step will be contributions,” Garcia continued. 

“There have already been a number of tests done on rollovers under the new data standards and all seems to be working as expected, so when it comes to SuperStream, I guess most funds are like that little duck on the pond. 

“On the surface, everything looks calm but underneath, those little legs are going at a thousand miles an hour.” 

Providing evidence for Garcia’s analogy, John McMurtrie, CEO of administrator AAS, said that SuperStream’s introduction of electronic rollovers was only the first step but that it had been an important one. 

“I’m chairman of the Affiliation of Superannuation Practitioners (ASP) and in that body, 10 administrators and major funds have come together to initially give effect to the Government’s desires for efficiency,” he said. 

“The first initiative was around rollovers and I’m happy to say that as members want to move from one APRA-regulated fund to another, all the data standards and security standards and message standards have been agreed. 

“So progressively through to December, all of the industry will come on-board,” McMurtrie added. “And I think that’s a fantastic achievement. 

“It’s a great sign of the cooperation that can be found within this industry if you can just get people together.” 

However for Garcia, as huge as SuperStream has been and will continue to be for the industry, it is rivalled by what are far more robust reporting requirements from APRA. 

“For me, that’s the third tsunami here,” he said. “And most funds have probably not so much ignored it so much as put it in the ‘we’ll get to that once we’ve dealt with MySuper and SuperStream’ basket. 

“But like it or not, it’s now very much here and it’s going to need a great deal of attention,” Garcia continued. 

“The good news, however, is that APRA has been listening so whilst its inevitable that the numbers are going to move from the 3,500 or 4,000 data item mark, they’re about to send out another consultation paper on the information that they’re collecting – and the hope is that it provides greater clarity. 

“But that’s going to be the big one, I think, and there’s still quite a lot of implementation that needs to be done.” 

Of course in any reform agenda, the prime frustration is always information flow. Policy is announced before legislative detail materialises and yet implementation timeframes are such that super funds are forced to act. 

For Hill, however, that is a status quo that has improved only with the passing of time. 

“Most of the information is out there now,” he said.

“Obviously, we’ve had recent deferrals in some of the disclosure requirements because the rules aren’t quite ready but it has been frustrating and it has been costly in that funds like ourselves have had to pursue the regulatory reform without full clarity around some elements of scope. 

“And when that’s the case, undoubtedly you do burn more money than if the scope had been constrained or known up front because you need to remain flexible,” Hill continued. “But that’s just been the fact of the matter, I suppose. 

“It certainly wasn’t a option for most players to sit and wait for certainty; you needed to get started and remain flexible to keep moving.” 

Alternatively, Garcia suggested that in the wake of the Coalition’s Federal Election win, delayed information and guidance was to be expected. 

“I think one of the key issues is that a lot of this is actually done as a directive of the Government,” he said.

“And this is absolutely no reflection on the new Government because they’ve only just got into power and they’re probably trying to figure all this out. 

“But ASIC (the Australian Securities and Investments Commission) and APRA will wait or defer to Government on some of these bigger decisions because ultimately it will be the Government to say ‘this is the way we want to go’ and then they implement it,” Garcia continued. 

“So yes, there are some issues that we will be trying to chase up with the Government on, those two or three things where the industry needs to really implement some of these reforms, and they’re mostly around Product Dashboard, employer contributions and so on. 

“And while these are small things, they’re things that actually make a big difference when it comes to letting super funds just get on with it.” 

In fact, it is exactly that kind of pragmatic approach to regulatory reform that super funds and their service providers would like to take. In most instances, the goals of regulatory reform are beyond dispute but it is the implementation of those reforms, in terms of both timelines and consequences, which McMurtrie believes requires further consideration. 

“If you take a step back, I think that with the rush, the almost indecent haste in terms of converting the Cooper recommendations around SuperStream and Stronger Super into action, there was a lot of both regulations and law that should have actually had the benefit of a bit more reflection,” he said. 

“In SuperStream, if you take the employer contributions as an example, from July next year and then progressively over a two-year period, there will be requirements on employers to actually send data in prescribed formats with respect to security, messaging and so on. 

“And at ASP, we’ve made the point to the ATO that this is complete and utter over-regulation,” McMurtrie continued.

“If you stand back and look at the industry, what’s actually happening at the moment is that funds are either directly or through their administrators or using other third parties actually building that capability to accept contributions from employers. 

“Now, the regulations and the law covering this actually go down a pathway of requiring what are very, very tight security standards, but that’s an enormous cost burden on employers and on small business in particular, and we’ve said to the ATO ‘look, you’ve got to actually go back and have a look at this’ – because funds and fund administrators are coming up with solutions on their own.” 

The reality, according to McMurtrie, is that electronic contributions are growing at an already high rate. 

“We already have a survey of our ASP members planned, asking them for some information on this, but we suspect that across the system the electronic submission of member contributions is probably approaching 75 per cent,” he said.

“And that sort of growth is suggesting that by the middle of 2016, that figure will rise to 98 per cent. 

“The question then is do you impose rules that might have to be forced on the 2 per cent [also] onto the 98 per cent and we’re saying no,” McMurtrie continued.

“So the market is producing the solutions and having this sort of regulatory overkill, I just think is a complete and utter waste of resources. 

“But I would also note that the new Government is concerned about red tape, that its concerned about over-regulation and I fear this could be one of those classic areas.” 

Perhaps not surprisingly, Garcia suggested that similar pragmatism was required within APRA’s Product Dashboard and portfolio holdings disclosure requirements. 

“Look, in this world of what’s been coined big data, the reporting requirements placed on super funds aren’t going to get any less,” he said. “And there are some great outcomes to come from big data and just crunching huge amounts of data with a purpose. 

“We’re certainly not going to be able to stop it and we probably wouldn’t want to, but what I would say is that if we’re then going to put it out into the general public, we really need to really find a balance,” Garcia added. 

“We have to know what outcome we actually desire and then we have to tailor the data we’re presenting to actually achieve it.” 

This time, Garcia pointed to portfolio holdings disclosure requirements as the example. 

“Take a super fund’s fixed interest portfolio,” he said. “There might be 20,000 or 30,000 lines of data, all with different yields, durations, where they’re held and so on. 

“Honestly, how will anyone ever know? And that could all too easily give members a perception of ‘oh, you’re just trying to hide something’ whereas under the letter of the law, funds have to provide exactly that,” Garcia added. 

“So we need to understand that complexity and then communicate it to members in such a way that they say ‘good, I understand where my money’s placed; if I really want to know, I can click a button and get the download but I’m happy with that amount of data.’ 

“The challenge is finding that balance.” 

Yet irrespective of whether one was talking about SuperStream, MySuper or APRA reporting, McMurtrie said that there was always temptation on the part of the Government and the regulators to cast the net too wide when it came to requirements. 

“So if there’s been one criticism of the APRA reporting, it is that they appear to be getting a whole lot of information which may or may not be particularly relevant for them to execute their mandate,” he said. 

“I think that’s what happened a number of years ago when all the new breach reporting came in and funds were reporting minor breaches like someone spelling a name wrong, for instance. 

“After about 18 months of that, I think APRA said ‘hang on, enough is enough, we’ve got to back off,’” McMurtrie recalled. “So I think what will happen is that we’ll get all of these new requirements and the data that comes with it – but they’ll then work through what is actually valuable information for them. 

“And I would expect that over time, there will be a narrowing.” 

Similarly conscious of the potential for unintended consequences, Hill said that providing too much information could be just as bad as providing none at all. 

“Again, transparency is a bit of a motherhood statement but I think there’s got to be an element of practicality that comes into it as well,” he said. 

“Having to disclose particular line items, and typical funds would have thousands and thousand of securities, whilst it adds to transparency and disclosure, I actually don’t think it adds to understanding. 

“In actual fact, it risks being a further barrier to members engaging,” Hill pointed out. “I think that the proportion or the number of members who want to know their superannuation fund’s reporting to the level of thousands of securities would be very, very low. 

“Something more pragmatic that gives members more useful and usable information is certainly warranted, but my concern is that this isn’t going to achieve that.” 

Of course, in what has been a huge program of regulatory reform for the super industry, hits and misses are inevitable. The burden on super funds and regulators has been enormous and for that reason more than any other, Garcia believes it is time to pause and take stock. 

“As much as there is still to come, we really need time to bed these changes down and find a measure for success,” he said. “On the whole, these reforms been costly but the question is how you ever really measure the intangible benefit of improved governance and improved transparency. 

“It probably is very difficult to put a dollar figure on it but the fact that we’re number one in terms of governance from the recent Melbourne Mercer Global Pension Index shows that we’re on the right path,” Garcia continued. 

“We just need time to implement and then see what’s working, what’s not and then tweak rather than make wholesale changes.” 

Offering another reason for pause, Hill said that reform fatigue was a very real concern for the industry. 

“That’s the concern that I have, that there’s been so much reform that there’s a bit of regulatory fatigue that I’m seeing around the industry,” he said. 

“The contributions aspect of SuperStream is still in front of us so we shouldn’t lose sight of firstly, what a big task it is, but also what the end benefits will be not only for members but for employers as well.” 

But for Hill, the biggest payoff for the hard work funds have done has not been such benefits. Rather, it has been how well the industry has come together to confront regulatory challenges. 

“When you’re under pressure, it’s amazing how a shared load galvanises people together,” he said.

“And that’s not only within funds and their service providers, because we’ve seen much greater collaboration across the industry associations and across sectors where we’ve always struggled to get that going in the past. 

“Whether it’s APRA reporting or MySuper or SuperStream, I think these reforms have made people realise that we have much more in common than in disagreement,” Hill continued. 

“I think we’re all hoping that sets a good foundation for future collaboration on system-wide issues that we can solve together.”