Superannuation industry's regulatory balancing act

Stronger Super has delivered a raft of new regulatory challenges for the superannuation industry but, as Damon Taylor writes, the objective is finding the right balance in looking after other people’s money.

As the Australian superannuation industry approaches what is likely to be significant reform brought to bear by Stronger Super, trustees and executives will be contemplating not just those public policy changes that have been advertised but also what compliance and regulation structures are set to be put in place around them.

There seems little doubt that change is in the wind, but while compliance and regulation may never be popular subjects, the reality, according to Fiona Reynolds, CEO of the Australian Institute of Superannuation Trustees (AIST), is that they are part and parcel of a maturing superannuation industry where Australians’ retirement savings are at stake.

“It’s always difficult to get the balance right between the regulatory requirements and making sure that they don’t take up so much time that you start impeding business,” she said.

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“But having said that, this is a $1.4 trillion industry, it’s other peoples’ money and there has to be a really robust framework around that.

“I’d rather see more regulation and appropriate safeguards than less regulation because, at the end of the day, we have to remember that it’s not our money.

“It’s other peoples’ money and they’re counting on us to make sure that they have a safe retirement.”

Sharing Reynolds’ sentiments, Peter Beck, CEO of administrator Pillar, said that Australia’s superannuation industry was in a privileged position thanks in large part to compulsory contributions.

“We have a compulsory revenue flow into our industry and we have significant tax incentives,” he said.

“We’re actually in a trust position where we’re holding money on behalf of other people, so I think it’s perfectly reasonable that the regulation around our industry should at least be up to the standards of the other financial services industries.

“You could even argue that our industry’s governance should be stronger, simply because we are one of the few industries that has compulsion.”

For Vamos, however, while industry reform and the regulation to accompany it is undoubtedly necessary, the biggest issue resides in timing.

“As a lot of our regulation is principle-based, a lot of what’s currently in place in terms of overall regulation is right,” she said.

“The biggest issue for the industry, particularly on a lot of the more precise regulations around tax concessions and ones that directly impact systems, is the number of changes.

“Detail isn’t a problem except when it’s changed every five minutes; that is what causes the issues,” Vamos continued.

“So the biggest issue here, particularly with what is likely to come from Stronger Super, is the amount of change and the timing.”

Vamos said that with the Future of Financial Advice (FOFA) reforms set to start on 1 July 2012, MySuper due to start in July 2013 and aspects of SuperStream being introduced as early as next year, the risk and cost involved for funds was enormous.

“We have a risk, for example, of some funds having to set up products for July 2012 and then replace those with another set of products or portfolios for MySuper in 2013,” she said.

“So not only does that raise the question of whether or not the industry has the capacity for that kind of change, when you’re doubling your work like that you’ve also got enormous cost.

“And what people forget is that those costs are ultimately borne by the member,” Vamos added.

“Even if the costs are only related to the retail sector, as is the case with FOFA, those costs have to come out of profit eventually, and some of the most substantial shareholders are members of funds across all sectors.

“A lot of the new reforms are very good and they’re particularly good for consumers, but let’s be sure they’re implemented in a cost-effective way."

Naturally, the Australian Prudential Regulation Authority (APRA) has already flagged a number of specific regulation changes for implementation.

From its proposed prudential standards to guidance on risk management, disclosure and liquidity, the industry’s regulator has given a clear indication as to what it is focused on.

For Reynolds, it is hitting the right targets.

“APRA’s prudential standards paper, in particular, is a good paper,” she said.

“I think that they’ve taken on board a lot of the industry’s concerns, things that were flagged through the Stronger Super process — and where the industry didn’t think things were going to work, they’ve acknowledged that and changed their approach in this final paper.

“They’ve got the balance right between the practicalities and needing to get where they’ve got to,” Reynolds continued.

“So I’m pleased with the way that they’ve worked with the industry, and I think that it sets a really good benchmark for funds.

“I’m sure that there will always be room for ongoing improvements, but I think this is going to take the industry to a new level, and probably a level that we need to get to if we’re really serious about looking after so many Australians’ retirement savings.”

Alternatively, Vamos points out that the gap that yet remains in the announced regulatory change is post-retirement.

“One of the biggest issues facing Australian superannuation right now is the need to open up post-retirement, and yet there’s not one part of these reforms that tackles that,” she said.

“It’s quite the opposite, in fact. MySuper actually says that you cannot offer a pension product out of a MySuper product.“

In terms of what has been announced, I suppose that it is hitting the right targets, but that’s simply because it’s hitting all targets,” Vamos continued.

“Again, it comes down to timing and whether agreed public policy outcomes actually eventuate.

“When you look at the time that we’ve got to review a lot of this draft legislation, I just can’t put my hand on my heart and say that public policy, as agreed, is going to be delivered — and that’s quite simply because the legislation has been drafted too late in the piece.”

Of course, Vamos’ concern is a valid one based upon the cost of change alone. Compliance and regulation are likely not popular topics of conversation in this industry, thanks in large part to the cost that seems to accompany them.

And yet, according to Beck, any worthwhile change will almost always be embraced by funds and administrators alike.

“Ultimately, if you do a cost/benefit analysis on this and the cost/benefit analysis stacks up, then it’s going to be good for everyone, and that flows on to members as well,” he said.

“Efficiency is a perfect example; if it’s change for change’s sake, it just costs funds money and that cost will have to be passed on to members.

“If, on the other hand, there are efficiencies to be gained, then the funds, administrators and trustees are more than happy to pay for the cost of doing those changes because we will all get the efficiencies coming through to us,” Beck continued.

“As long as there’s that payback from the change, then it will always worth doing.”

Speaking not only to financial cost but to the price paid in terms of member frustration and confusion, Reynolds said that one of the industry’s perennial complaints was that constant change was confusing to people.

“So if the goal posts keep getting moved, then that can lead people to lose faith in the industry,” she said.

“They ask themselves whether they want to put extra money in because they’re doing it on the basis that they’re going to be able to do x, y and z.

“But then the rules change, stopping them from doing that and they say ‘why bother!’” added Reynolds.

“So I do think that any time the Government and regulators, or the industry, want to promote change, we have to bear that in mind.”

Yet Reynolds was quick to add that such a reality did not mean that the superannuation industry could be caught standing still when it came to compliance and regulation.

“We just have to get the balance right,” she said.

“At the end of the day, yes, costs do get passed on but, at the same time, as we’re getting bigger economies of scale and more money in the industry, that brings efficiencies as well.

“Hopefully they can balance each other.”

Not surprisingly, Vamos pointed out that if the Stronger Super reforms do not deliver consumers a better experience and grant them a better understanding of their superannuation, then the industry had missed its mark badly.

“I actually think that a lot of the reforms will have enormous benefits for consumers,” she said.

And if these reforms don’t deliver consumers a better experience when dealing with our industry, then the reality is that we should all go home.

“If consumers don’t start seeing efficiencies, if consumers don’t start seeing easier comparability, if they don’t start seeing greater transparency, if they don’t start seeing a portfolio that they don’t have to think about, then we have bigger issues,” Vamos continued.

“They have to be able to really trust in the fact that the trustee is working to their best interests.

“And this is the reform that has to do that in the short term. It’s just that simple.”

At the end of the day, the reality seems to be that changes to this industry’s compliance and regulation regime are never going to be popular.

However, that lack of popularity isn’t going to stop what is a huge industry overhaul, or the regulatory change that will likely follow it.

According to Vamos, such change is inevitable.

“Often what happens when you’ve had such extensive regulatory reform, there is a lot of mopping up,” she said.

“So there’s a lot of regulation to clarify and to provide some certainty with, and to remove anomalies from.

“But what I think we will see is, as happened in the financial services industry with FSR (the Financial Services Reform Act), the whole compliance and risk sector will grow within the superannuation industry,” Vamos continued.

“And because a lot of compliance is now rules-based and principles-based, the compliance measures you’ve got to have in place to ensure that you know that you’re compliant with the law means that a number of funds will look more and more at compliance frameworks.

“Those conversations are happening now but I can see them being struck at much higher levels within funds and within the industry.”

Similarly, Reynolds said that there was likely no end in sight to regulatory change within the superannuation industry.

“Hopefully though, once MySuper’s all bedded down and FOFA’s all bedded down, it won’t be such drastic change,” she said.

“Hopefully, it will be tweaks here and there as required rather than any more wholesale change.

“Overall, I think we are heading in the right direction here,” Reynolds continued.

“My only concern is that we’re on such tight deadlines at the moment with getting legislation into Parliamentary sitting periods.

“And when you’re always rushed to do things, does that mean you miss things? That’s my only concern, because this is something we’d really prefer to get right in the first place.”

Looking big picture, Vamos said that her own underlying concern lay in a lack of focus on members’ whole-of-life needs.

“Whole-of-life investing, whole-of-life service and a focus on APRA-regulated funds being able to tailor their services to individual member needs,” she said.

“So we’ve still got a way to go there, but I think generally the public policy is going in the right direction.

“The challenge for us today is getting the regulation right but once that’s done, that has to be our focus; bringing public policy and regulation in line.”