Super regulator prepares for tough new stance

This week, Ramani (SG) Venkatramani, the general manager of APRA’s diversified institutions division, will fly to a conference of worldwide pensions industry representatives in Beijing, where he will no doubt once again be highly sought after for a perspective on Australia’s much lauded superannuation system.

Around the world, particularly amongst countries with less developed structures for retirement income accumulation, Australia’s system of compulsory superannuation savings is held in high esteem as a model of world’s best practice.

But locally, the Australian superannuation industry has just faced one of its toughest year’s on record, where lower than expected returns have been compounded by attacks on the credibility of the system itself, and the regulators who were meant to be policing it.

The high profile collapse in the last 12 months of groups like Commercial Nominees of Australia (CNAL) has undermined the community’s confidence in the safety of superannuation and raised questions about the effectiveness of APRA in protecting the retirement savings of individual investors.

In the CNAL case, up to 25,000 investors lost part of their retirement savings when CNAL, an APRA approved trustee, disintegrated under the weight of a series of inappropriate investments.

Those mostly affected were 475 or so Small APRA Funds (SAFs) — do-it-yourself (DIY) funds still regulated by APRA - many of whom placed their money with the approved trustee on the advice of financial advisers, including the likes of Saxby Bridge Financial Planning.

In fact, Saxby Bridge’s general manager Phillip Dally was himself a victim of the CNAL collapse, with the Dally family superannuation fund having appointed CNAL as its trustee.

While the CNAL scenario has been painted as an isolated incident, it is clear that APRA has been stung by criticisms it has not acted vigorously enough to protect superannuation assets, and the talk coming from APRA ever since indicates the regulator feels it now has a mandate to pursue a much tougher line in the supervision of superannuation.

That is likely to mean much stricter standards for the establishment and running of all types of superannuation funds, including the vast majority of self-managed superannuation funds (SMSF) that are now supervised by the Australian Taxation Office (ATO).

The ATO declined to comment for this article, but in an interview withMoney Managementbefore his trip to Beijing, Ramani confirmed APRA and the ATO were working closely together in the prudential regulation of superannuation funds, and that any changes to the regulation of APRA-supervised funds, particularly SAFs, would more than likely be transferred across to the SMSFs regulated by the ATO.

And the basic skeleton of what will form the changes to APRA’s policy in the regulation of superannuation has already been made public with the release last month of an issues paper into options for improving the safety of superannuation.

The paper, although released by the Minister for Financial Services Joe Hockey, essentially mirrored recommendations APRA had been circulating for some months, including in a formal submission it made to a Productivity Commission inquiry into superannuation legislation.

What has emerged most clearly, from the issues paper as well as from comments made by a range of APRA senior executives, is that the regulator is preparing to place a greater level of scrutiny on the investment strategies and objectives of superannuation funds.

Ramani says the regulator was already in the process of developing a set of prudential guidelines that would set out more clearly what the regulator expects from the investment strategies of funds.

The guidelines, to be released over the next couple of months, are expected to include portfolio limits to ensure investments are sufficiently diversified for APRA’s liking, and tougher requirements on asset management more generally.

“We have formed the view, and both the Government and the industry has supported us, that [lack of diversity in investments] is not acceptable and people who are doing that are not only doing the wrong thing by their own members, but also bringing down the reputation of the entire industry, which on the whole is well behaved,” Ramani says.

“Basically, what we are saying is that we do need to tighten up at the fringes in regard to people who do not formulate a proper investment strategy and who do not stick to it. Where we find there are problems, we won’t mind taking a hard line.”

Those are strong words from a regulator that has historically taken a conciliatory approach to regulating superannuation. The comments are directed mostly at the thousands of smaller corporate funds that APRA has previously admitted it is finding difficult to supervise.

But there is no doubt that a tougher stance on funds the regulator feels have a less than appropriate investment mix, a common criticism of the DIY side of super, could impact on DIY investors and the financial planners and accountants who advise them.

A survey released earlier this year by the ATO on the investment mix of SMSFs has helped water down criticisms that are often levelled at DIY super funds over the suitability of their investment strategies. It found, for example, than on average SMSFs invest only about 10 per cent of their assets in direct property, dispelling somewhat the perception that DIY super is just a convenient vehicle to direct funds into commercial property associated with family-owned businesses.

However the ATO has indicated in private discussions with groups like the Financial Planner’s Association (FPA) that it does still have some concerns about the investments of SMSFs and that it will ultimately make recommendations of its own to the Government separate of any plans APRA may already have.

For its part, the FPA is still in the process of devising a response to what now appears will be an inevitable change in the way APRA regulates superannuation, but the association is clearly concerned the regulator’s stricter regime will amount to another layer of responsibility for advisers already having to come to terms with the Financial Services Reform Act.

“Everyone understands that superannuation is complex, so you don’t want to over regulate,” the FPA’s senior manager of public policy Con Hristodoulidis says.

“You need mechanisms to ensure the safety of funds but you don’t want mechanisms that emphasise safety at any cost.”

That’s the big question now. That APRA will respond to increasing concerns about the safety of superannuation, and about its own effectiveness as a regulator, is a given. Precisely how it will respond, and how wide the implications will be, even for funds regulated by the ATO, remains to be seen.