By Mark Bland, Partner and Geoffrey McCarthy, Special Counsel

This fortnightly update is designed to help superannuation trustees track and manage regulatory change. We look ahead to forthcoming developments, look back at recent changes and then consider the impact on trustees. This edition’s spotlight is on APRA’s release on the requirements for a Business Performance Review and Member Outcomes Assessment.

Key developments

• 24 July – Treasury’s Retirement Income Review delivered to the Treasurer
• 23 July – Eligible Australian and New Zealand citizens and permanent residents can now apply to access second tranche of up to $10,000 of their super until 31 December 2020.
• 22 July – APRA publishes FAQs on COVID-19 Pandemic Data Collection Request.

Looking ahead

This week the Treasurer is expected to release the Treasury’s Retirement Income Review final report which was presented to the Treasurer on Friday 24 July. The Report which had been due in June 2020 is expected to discuss whether the current schedule of SGC rate increases should be retained.

27 July – Plaintiff law firms to appear at hearings for Parliamentary Joint Committee on Corporations and Financial Services on Litigation funding and the regulation of the class action industry

29 July – Hearings for Parliamentary Joint Committee on Corporations and Financial Services on Litigation funding and the regulation of the class action industry . The program of witnesses for the hearing is not yet published.

31 July – ASIC to have published a new regulatory guide, Regulatory Guide 271 Internal dispute resolution, outlining updated IDR standards and requirements in July 2020. See ASIC timetable

31 July – The first monthly and quarterly Pandemic Data Collection reports are due for submission to APRA via D2A. COVID-19 Pandemic Data Collection Request

Looking back

24 July – ASIC publishes updated 97 which addresses minor amendment effect by ASIC Corporations (Amendment and Repeal) Instrument 2020/579 noted below Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements

24 July – Exemptions for class action litigation funding schemes removed for funding arrangements entered on or after 22 August 2022 Corporations Amendment (Litigation Funding) Regulations 2020.  From then arrangements will be subject to the managed investment scheme and Australian financial services licensing provisions in the Corporations Act.

23 July  – APRA releases letter to trustees reaffirming expectations about Strategic Planning and Member Outcomes – APRA releases letter to superannuation licensees on upcoming legislative obligations.

23 July – New commencement dates confirmed for ERF Closure – Economic and Fiscal Update July 2020 pg 81

23 July – Closing date extended to 31 December for COVID-19 Early release of super – Economic and Fiscal Update July 2020 pg 9

22 July – ASIC effects transitional requirements for PDS for Fees and Costs Disclosure  – ASIC Corporations (Amendment and Repeal) Instrument 2020/579. An updated Regulatory Guide 97 has also been issued taking into account the instrument. The revised requirements apply to PDS from 30 September 2022 or 30 September 2020 on an opt in basis and for periodic statements for periods commencing on or after 1 July 2020. The instrument makes some technical changes to ASIC fee and cost disclosure requirements.  It provides relief from providing a significant events notice merely because of the presentational changes in disclosure due to ASIC requirements but this relief does not apply if there is actually a material increase in fees disclosed.  The instrument also ensures that there is no requirement for disclosure of performance fees in interposed vehicles, although these fees must still be included when calculating the amount to be disclosed for the relevant option or product. This instrument also makes a technical change to PDS in use notice relief relevant to small APRA Funds.

22 July – APRA publishes FAQs on COVID-19 Pandemic Data Collection Request Frequently asked questions – Pandemic Data Collection.  The FAQs give detailed practical guidance for completing the required forms.  APRA will continue the enhanced date collection until issues relating to the pandemic have abated and will reassess in late September 2020 whether there is a continuing need.

15 July  – Public Hearing PJC Hearing  Oversight of ASIC  – Parliamentary Joint Committee on Corporations and Financial Services – Opening statement – 15 July 2020 ASIC emphasised its role in informing consumers including through MoneySmart

15 July – FASEA registers instrument extending time to meet CPD requirements FASEA Educational Requirements Corporations (Relevant Providers Continuing Professional Development Standard) Determination (Amendment) 2020

13 July- Hearing for Parliamentary Joint Committee on Corporations and Financial Services on Litigation funding and the regulation of the class action industry.

10 July – ASIC updated its FAQ on communication from trustees to members on insurance in superannuation COVID-19 – Information for superannuation trustees Frequently asked questions  ASIC spells out some key expectations around disclosure concerning how cover is affected by changes in employment, rules around cessation of insurance, whether pandemic clauses apply and how members can get more information.

On the horizon spotlight – Business Performance Review and Outcomes Assessment

APRA released on 28 August 2019 an updated version of the following:

• Prudential Standard SPS 515 Strategic Planning and Member Outcomes
• Prudential Practice Guide SPG 515 Strategic and Business Planning

The revisions to SPS 515 complimented the passage of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Act 2019. The key change to the prudential standard SPS 515 was the introduction of an obligation for trustees to undertake a Business Performance Review as part of the superannuation fund’s strategic and business planning process.

Prudential guidance SPG 516 Business Performance Review was released in November 2019. The guide includes guidance on the annual outcomes assessment and Business Performance Review.

The commencement date of SPS 220 and SPS 515 was 1 January 2020. Trustees are now required to plan to comply.  This is an area of emphasis for APRA especially in light of the implications of COVID-19.

The Business Performance Review under SPS 515 must be completed by 31 December 2020, and each year thereafter.  The outcomes assessment must be completed by 28 February 2021 and after that as a part of each Business Performance Review (BPR).  The outcomes assessment and comparisons must be published within 28 days of the outcomes determination.  APRA has reaffirmed the importance of meeting the requirements in its letter to trustees of 23 July 2020.

APRA acknowledged in its letter the challenges currently facing trustees including in the context of COVID-19 but APRA considers meeting the requirements of SPS 515 is relevant and essential.

APRA noted that it has consistently encouraged RSE licensees to engage early with APRA on the design of their BPR and the outcomes assessment, given the level of complexity involved in complying with these requirements. Despite this, APRA has seen a low take-up of this offer and is concerned that the lack of trial outcomes assessments being shared with APRA may be indicative of a lack of preparedness by the industry.

APRA said that there are numerous considerations that RSE licensees need to work-through in order to fulfil these obligations and indicated it would respond to issues as they arose by further FAQs.

APRA emphasised the importance of data quality and capabilities to meet the Business Performance Review and outcomes assessment requirements and said APRA will continue its strong focus on lifting data quality and capabilities across the industry.

Business Performance Review

The revisions to SPS 515 include a requirement for superannuation funds to undertake a business performance review (BPR) as part of its strategic and planning process.

SPS 515 requires that the superannuation fund conducts an annual review of its performance as measured against its strategic objectives to determine areas for improvement within its business operations. Trustees may exercise their discretion in designing an appropriate business performance review process. APRA says trustees need to consider the design of their products, based on analysis using cohorts and objective benchmarks the trustee determines, and determine whether the business is being operated in a way that supports delivery of appropriate member outcomes.

The BPR includes:

• an analysis of whether the superannuation fund is achieving its strategic objectives;
• the key factors which affect the extent to which the superannuation fund is achieving its objectives; and
• a conclusion as to whether the outcomes for members have been achieved and as applicable whether it is expected these objectives will continue to be met.

Trustees must be able to demonstrate, as part of their review of strategic objectives and business planning, how they will respond to recent changes in policy settings and the impacts arising from the pandemic on, for example, future revenue streams and financial projections for their business operations.

Areas for improvement that are identified during the BPR must be reflected in the superannuation fund’s business plan. Given that outcome assessment regulations are yet to be finalised, APRA have advised that the first BPR will not need to include the first annual outcomes assessment and the outcomes assessment must be made by 28 February 2021.

APRA has a focus on robust examination of members’ financial interests and whether a fund should be merged or exit.

Annual Outcomes Assessment

The annual outcomes assessment was introduced into the Superannuation Industry (Supervision) Act in April 2019 and replaced the ‘MySuper scale test’. The outcome assessment obligations under section 52(9) requires a RSE licensee to assess and conclude, on an annual basis, whether the relevant product promotes the financial interests of the members holding that product. The assessment must be conducted for both MySuper and choice products.

SPS 515 requires that the outcomes assessment provide for an explanation for how it has designed the assessment. The guidance SPG 516 Business Performance Review states that an outcomes assessment methodology should incorporate factors including:

• timing for undertaking the assessment;
• product boundaries;
• data sources;
• framework to undertake a comparison and assessment of relevant factors; and
• allocation of roles and responsibilities for assessment functions, including external providers as required.

SPG 516 also provides guidance on how RSE Licensees should assess and make a determination on the extent to which a product promotes the financial interests of the relevant members.

Supporting Superannuation Industry (Supervision) Regulations on the outcomes assessment requirement are yet to be finalised. In the absence of any regulations, the outcomes assessment for choice products is at the discretion of the trustee but must be based on the assessment factors under section 52(11) of the SIS action, including:

• the appropriateness of options, benefits and facilities offered under the product; and
• the appropriateness of the investment strategy (including risk and target return), for the relevant members.

The determination must be published on the superannuation fund’s website 28 days after making an outcome assessment.

APRA says that MySuper product should not involve members paying for more than the basics.  APRA thinks that there is a real opportunity to streamline choice products and options, and considers there is too much choice and this works against competition.  Failure to do this will make the outcomes assessment very challenging.

Impact on Trustees

It is anticipated, from APRA’s industry consultation, that many trustees already review their business practices and operations and should be able to identify what steps need to be taken to comply with the BPR requirement.

SPS 515 and APRA’s following communications indicates a greater onus on superannuation funds to identify areas for improvement and take prompt action to address weaknesses that are detrimental to members. This will be critical to avoid APRA exercising its directions power against trustees and superannuation funds who fail to act in the best interests of their members.

APRA will in checking that trustees include a focus on how realistic models are in the current environment taking into account the implications of the COVID-19.

Trustees need to able to justify why their funds have a right to remain rather than be merged. The quality of data is important to this including about members, liquidity management and valuation.  Also consideration will be expected about whether there is a basis for maintaining the number of investment options.

APRA indicated in an AFSA seminar on 28 May 2020 that it considers that compliance with SPS 515 is even more important during the COVID-19 pandemic, and a focus for them remains whether tail performing funds can justify their existence.

Action Items

Prior to the first outcomes assessment and business performance review, trustees should undertake the following steps:

• undertake a gap analysis to identify areas which do not meet the requirements of SPS 515, particular which aspects of the business performance review process are not currently being undertaken;
• design and implement processes to address those gaps;
• prepare a draft of the outcomes assessment methodology with reference to SPS 515 and SPG 516;
• engage with APRA to review and finalise the draft outcomes assessment process.

If a trustee has not already progressed in this, it should pursue the necessary steps with urgency.