KEY TAKE OUTS
- Innovation will always involve change.
- The APRA risk and governance prudential frameworks require super fund trustees to identify, assess and monitor change.
- This translates to a duty to identify, assess and manage innovation.
- The future success and competitive advantage of your fund will reflect how well you do this.
Change will not always be innovation; however, innovation will always involve change. The change may be gradual but most likely it will be more frequent and intense and therefore disruptive. What is a superannuation fund trustee’s obligation to manage disruptive change and innovation?
The governance framework of each APRA-regulated superannuation fund provides the mechanisms for identifying and managing current and future changes in the superannuation environment. It also holds trustees responsible for the sound and prudent management of the RSE licensee’s business operations.
To borrow the words of Shakespeare: some will achieve innovation and others will have innovations thrust upon them. How does a superannuation fund prepare for the future challenges of innovation in the superannuation system?
The concept of change and superannuation go hand-in-hand. Examples of significant and relentless change in the superannuation industry over the past two decades include:
- introduction of the Superannuation Industry (Supervision) Act 1993 (Cth);
- Wallis Financial System Inquiry 1997;
- Henry Tax Review 2009;
- Cooper Review 2010;
- MySuper and Super Stream 2010;
- Financial System Inquiry 2014 and the Government’s response 2015;
- Productivity Commission inquiry into the Efficiency and Competitiveness of the Superannuation System 2016.
In thinking about what innovations we have seen over the years in the superannuation industry which bear the hallmark of disruptive changes to achieve better outcomes, the following examples come to mind:
- award super and compulsory superannuation guarantee contributions (SG);
- the continuing growth of SMSFs;
- member fund and investment choice;
- platforms offering product diversity;
- outsourcing of expertise eg administration
- and IT;
- unit pricing;1
- prudential regulation of superannuation
- fund trustees;
- My Super; and
- Super Stream.
Given the importance of the superannuation system to the Australian economy and its foundation in compulsory contributions for employed members, this pace and intensity of change can be expected to continue. This leads us to ask - what’s next? Some areas for future focus for potentially disruptive change include:
- increasing transparency of fund statistics and performance;
- pressures for reduction of fees and costs;
- consolidation of funds with insufficient scale;
- digital transformation in investments and financial advice channels;
- equality and equity in superannuation benefits;
- an ageing membership demographic;
- provision of income in retirement to substitute or supplement the age pension via comprehensive income products in retirement (CIPRs).
Funds wanting to gain or retain a competitive advantage will want to proactively identify and
manage disruptive changes/innovations in areas such as these in order to ensure that it enables rather than threatens growth and or excellence in the delivery of the fund’s products and services.
Fund governance & risk management obligations
In terms of the governance framework for APRA-regulated superannuation funds, there are clear governance and risk management obligations to ensure that material risks posed by disruptive change are identified and managed.
Under SPS 220 each trustee must:
- ensure its risk management framework covers all material risks, both financial and non-financial, to its business operations, having regard to the size, business mix and complexity of those operations;
- have a written plan that sets out the strategic direction of the trustee’s approach to managing its business operations (business plan). The business plan must cover the entirety of the trustee’s business operations, be aligned with the risk management framework and be approved by the Board prior to its adoption and at any time that it is materially revised;
- maintain an up-to-date risk appetite statement that covers the trustee’s business operations and each category of material risk; and
- maintain an up-to-date risk management strategy for its business operations that covers each material risk.
While all trustees are no doubt well aware of these obligations in theory, the challenge is for each trustee to effectively implement their strategic business planning processes and risk management framework to ensure that they are effectively managing the threat or opportunity of innovation.
Trustees should also keep in mind that they must notify APRA within 10 business days if it discovers that the risk management framework did not adequately address a material risk.
It is therefore timely to undertake an objective review of the strategic, governance and other material risks that have the potential to impact on the trustee’s business operations and identify controls and mitigants in respect of each.
Funds in the habit of applying robust and regular scenario testing designed to test their ability to respond to some of these challenges will be more likely to be better equipped to manage them and the associated risk of reputational damage.
Mitigants could include:
- a dedicated function for monitoring developments in the industry and competitors;
- reporting to management and Boards on these developments;
- reporting to the Board on the effectiveness of the risk management framework in light of these;
- reporting to the Board on progress against the Strategic Business Plan;
- regular communication between Board and management, regulators and industry analysts;
- a culture encouraging new ideas. This could be facilitated from time to time for example by: designated design thinking think tanks; support for appreciative inquiry and constructive challenge.
APRA has recently commented that it would expect to see adjustments to Strategic Business Plans to reflect disruptive events or delivery of innovation. In her address to the AFR Banking and Wealth Summit in Sydney , Helen Rowell, Deputy Chairman of ARPA, said:
“In this context, superannuation boards should be:
- setting strategic direction and developing robust business plans; and
- ensuring appropriate benchmarking, monitoring and review of their operations, services and performance in all areas.
Some superannuation boards have developed rigorous and proactive strategic and business planning processes, recognising the need to adapt, respond and remain relevant in a rapidly changing environment. In some instances, however, strategic and business planning appears to have more focus on ensuring compliance with legislative and prudential requirements than addressing core strategic and operational challenges.”
Additional components for the appropriate governance of innovation are referred to in SPS 510 on Governance. The Board must ensure that directors and senior management, collectively, have the full range of skills needed for the effective and prudent operation of the trustee’s business operations, and that each director has skills that allow them to make an effective contribution to Board deliberations and processes. This includes the requirement for directors, collectively, to have the necessary skills, knowledge and experience to understand the risks of the trustee’s business operations, including its legal and prudential obligations, and to ensure that the trustee’s business operations are managed in an appropriate
way taking into account these risks.”
In addition, the Board must have procedures for assessing the Board’s performance, as well as the performance of each individual director, relative to the Board’s objectives. The additional requirement for the Board to have a formal policy on Board renewal is intended to ensure that the Board remains open to new ideas and independent thinking. This is critical in the context of ensuring that the trustee can effectively address and manage the challenges of innovation and disruptive change.
The governance framework for a fund must be able to continuously identify new trends and respond appropriately. Everyone, from the Board through to management, committees, working groups, senior and junior management needs to take responsibility for keeping the risk management framework and the trustee’s strategic business plan relevant and effective.
Success will be measured not by compliance alone but by demonstrating robust processes to manage innovation with excellence. Success will mean that the fund will not only be compliant, it will be attractive to existing, as well as new, members and therefore be more likely to maintain sustainable operations in an increasingly competitive environment.
1. Sean McGing & Andrew Mead, ‘Innovation in Superannuation’ 2010, Institute of Actuaries 5th