In a broadening of the current debate on culture and governance, APRA’s Deputy Chairman, Helen Rowell, told the AFR Banking and Wealth Summit on 5 April 2016 that APRA will also be focusing on governance and culture in the superannuation industry in 2016. Her comments are timely and follow closely on the release of the work of Scott Donald and Suzanne Le Mire of the Universities of NSW and Adelaide respectively on 4 April 2016 Independence in Practice: Superannuation Fund Governance through the eyes of Fund Directors see HERE.
The study makes for an interesting read. Some of the excerpts of interviews with superannuation fund directors support APRA’s focus.
APRA considers governance and culture is critical in the superannuation industry as the best interests of fund members are heavily reliant on trustees doing the right thing. This in part probably reflects the absence of tried and tested governance mechanisms. For example, unlike ASX listed companies, there are no obvious say on the fee pool for controls on trustee remuneration, and likewise, no say on pay mechanism to ensure appropriate executive remuneration.
Helen Rowell explained that sound governance is not simply a reflection of investment performance – “ sound governance requires rigorous decision-making and oversight processes to be adopted by trustees to ensure all decisions are well-founded and that the duty to act in the best interests of beneficiaries is front of mind at all times”.
Therefore, APRA will be looking at the processes of superannuation funds for the appointment of directors and for board performance evaluation. Anecdotally, there is evidence that this is not being undertaken in a rigorous and independent manner.
The focus of APRA’s review includes:
- The size of the board. This may be hindering effective functioning and decision-making. APRA is encouraging boards with 8 to 12 directors and more to look at the number of directors and consider the merits of reducing that number.
- Director tenure. A review will assist a board ensure renewal and fresh perspectives that can promote challenge to board decision making.
- Skills matrices and skills gaps. An objective assessment will also aid board renewal.
- More rigorous performance assessment of the board. Currently there appears to be an unacceptable level of ‘soft’ self-assessment. APRA believes follow-up action on self-assessment approaches is quite limited.
APRA’s work throughout 2016 will be helping superannuation boards recognise that it expects them to have sound governance practices across each of these areas.
The Deputy Chairman also explained that APRA will be carrying out a deeper review of practices of superannuation funds in respect of management of related party arrangements and the board’s oversight thereof.
Aligned with APRA’s approach on board effectiveness is its focus in 2016 on how superannuation fund boards approach strategic and business planning. Helen Rowell said, in this regard, superannuation boards should be:
- Setting strategic direction and developing robust business plans; and
- Benchmarking, monitoring and reviewing the operations, services and performance in all areas.
Her concern was that superannuation boards should be focused on strategic and operational challenges rather than being compliance driven. Ms Rowell identified the following drivers that will impact strategy:
- Cash flow negative or declining net assets is a critical issue that every fund should be considering.
- In this same context is that funds need to understand the trends in total benefit payments.
- Retirement products and options for members are becoming increasingly more important with the changing demographic trends.
- Industry concentration and fund size should be continually considered by boards to ensure they understand the implications of emerging trends on their member best interest obligations. In other words, there has not been enough consolidation to achieve economies of scale.
See HERE for Helen Rowell’s speech.
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