APRA tells super funds to shape up or merge

Regulator to pile pressure on underperforming super funds with heatmaps detailing high fees, poor returns.

APRA deputy chair Helen Rowell

The prudential regulator is set to step up pressure on underperforming superannuation funds to shape up or merge from next month with the release of heatmaps detailing high fees and poor returns.

Australian Prudential Regulation Authority deputy chair Helen Rowell said the maps would give super fund trustees a clear picture of issues that needed to be addressed and motivate them to act.

Releasing a discussion paper and sample heatmap yesterday, Ms Rowell said the colour-coded heatmaps would also help direct APRA’s enforcement activity.

“Trustees can expect APRA’s supervision intensity to reflect the intensity of the colour shading on the heatmap,” Ms Rowell told the annual Association of Superannuation Funds of Australia conference in Melbourne.

“If trustees don’t fix these issues within a time frame that is acceptable to APRA, we will be requiring them to consider other options, including a merger or exit from the industry in some cases.”

Heatmaps for more than 100 MySuper funds are set to be released by the middle of December, with colours ranging from yellow to dark red highlighting underperformance in investment returns, fees and costs, and sustainability of member outcomes.

The sustainability measures provide an indication of a trustee’s ability to provide quality member outcomes in the future and address areas of underperformance, Ms Rowell said.

A newly empowered APRA has been adding tools and capabilities to eliminate persistent underperforming fees and force mergers to create fewer, larger and better performing funds in the aftermath of the Hayne royal commission and a Productivity Commission review of superannuation.

The PC report found significant unrealised economies of scale still remained in the fast-growing $2.9 trillion superannuation system. Cost savings of more than $1.8bn a year could be made if the 50 highest-cost funds merged with 10 of the lowest-cost funds.

Assistant Minister for Superannuation Jane Hume said excuses for funds not to merge were disappearing. She said it would be “outrageous” if shareholders in the not-for-profit funds attempted to extract compensation as the price of letting their sponsored fund merge with another, or thwarted a deal over concerns at the loss of director fees that are often repatriated to sponsoring union and employer groups.

“The shareholders of a trustee may well have a role to play to smooth the path for merger,” she said. “It is unthinkable that they should stand athwart the road seeking to extract a payment.”

Financial Services Council chief executive Sally Loane said the industry was not consulted on the heatmaps.

Ms Loane said the heatmaps should not be used as “simplistic league tables” and that it was not clear whether some measures applied to the whole fund rather than the product being offered.

APRA will apply the heatmaps to default MySuper products before extending them to choice products offered by the retail and industry fund sector.

“The variation in choice superannuation products in the market makes them significantly more difficult to accurately compare, and there are not currently agreed metrics and standards for how this would occur,” Ms Loane said.

“We recommend APRA be cautious in extending this exercise to choice products before they have access to appropriate, comparable data.”