APRA requires less of superannuation funds’ governance and remuneration

While many have been watching the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry with the same fascination as they would a slow-motion car crash, superannuation funds have until now mainly escaped the heat.

This may be about to change, with the next round of hearings (August) set to focus on the superannuation industry.

Given the current focus on superannuation board governance, including the proportion of independent directors in industry funds (remember the proposed legislation that was never passed? See HERE), it is fair to say that superannuation board governance may receive more scrutiny.

With this in mind, Guerdon Associates has taken a look at APRA’s prudential governance standards for APRA-regulated institutions in the deposit-taking, general insurance, life insurance, and private health insurance industries (CPS 510) and compared them to those for superannuation funds (SPS 510).

Our conclusions are that APRA’s governance standards for superannuation funds are less demanding than that of other APRA regulated entities.

Differences between superannuation (SPS) and other APRA regulated entities (CPS) include that:

– CPS dictates a minimum board size while SPS does not

-CPS has independence requirements for board and committees while SPS does not

– SPS allows the chairman of the board to chair the audit committee if they are the only independent director

– CPS requires a board risk committee, SPS does not.

– CPS has additional clauses regarding foreign owned entities, subsidiaries, joint ventures etc

– CPS has standards about appropriate representation on the board given shareholding

– SPS says the remuneration policy must be designed to encourage behaviour that supports protecting the interests and reasonable expectations of beneficiaries in addition to the CPS requirements of long term financial soundness and risk management framework

-CPS has more stringent clauses around management of conflicts of interest with the auditor and imposes minimum time periods before someone involved in audit can become the chairman

-SPS has requirements not spelled out in CPS about developing a governance framework and what it should contain

APRA guidance on remuneration PPG 511 (for banks and insurers) and SPG 511 (for superannuation fund companies) have more dramatic differences – there is a variation in length of over 10 pages. Some examples of differences include:

-PPG provides a guideline on how often to review the remuneration policy

-PPG has a section on remuneration of risk and financial control personnel, it appears SPG does not.

-PPG has a section on measuring performance. SPG does not.

-PPG has a section on measuring performance over time (with extensive guidance on deferral), SPG does not

-PPG and SPG are different in the way they talk about adjusting remuneration for risk: SPG seems to place more emphasis on non-financial measures

-PPG includes a section on fringe benefits and perks

-PPG also has attachments containing FSB principles for sound compensation practices. (APRA states that in developing its prudential standards and prudential practice guide, it has aligned its requirements with the FSB’s Principles and Implementation Standards. Boards may have regard to the FSB’s Principles and Implementation Standards for further guidance in addressing APRA’s requirements.)

Some superannuation funds might want to consider the more rigorous standards applied to other APRA regulated entities.

See HERE for SPS 510, HERE for CPS 510, HERE for PPG 511 and HERE for SPG 511 .

© Guerdon Associates 2021
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