Governance and culture in superannuation

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Helen Rowell, Deputy Chairman of the Australian Prudential Regulation Authority (APRA) addressed the AFR Banking and Wealth Summit in Sydney earlier this month.

She advocated that having sound governance practices and a good culture is important right across the financial services sector and particularly so in superannuation, as protecting the best interests of fund members is so heavily reliant on trustees doing the right thing.

“The superannuation prudential framework is heavily focused on promoting the right behaviours in the oversight of members’ funds as members bear the cost of mismanagement or poor decision-making on the part of trustees”.

She pointed out that sound governance goes well beyond who is sitting on the board; “it requires rigorous decision-making and oversight processes to be adopted by trustees to ensure that all decisions are well-founded and that the duty to act in the best interests of beneficiaries is front of mind at all times”.

In 2016, the APRA will be taking a closer look at director appointment and board performance assessment processes including:

  •  some boards are larger than would seem optimal, which may hinder effective functioning and decision-making, and should be reduced in size
  • some boards either don’t have tenure limits as part of their renewal policy, or don’t apply them in practice, which may compromise independence
  • the processes used to assess skills gaps on boards vary widely but often rely substantially on self-assessment rather than more objective approaches
  • board performance assessment processes can also be quite soft, again relying substantially on self-assessment, and follow-up action in response to any such assessments often appears quite limited

Rowell maintains that the APRA thematic review of director appointment and board performance assessment processes is intended to highlight better industry practices as well as areas for further improvement, with a view to helping to move all APRA-regulated superannuation boards towards sound governance practices in these critical areas.

Another area on which APRA will be focusing over 2016 is strategic and business planning. In this context, Rowell recommends that 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

In some instances, strategic and business planning appears to the APRA to be more focused on ensuring compliance with legislative and prudential requirements than addressing core strategic and operational challenges.

In other cases, strategic and business planning does not seem to be supported by adequate forward-looking analysis. In other words, there is inadequate sensing and horizon scanning.

Rowell added that equally important is the setting of an appropriate investment strategy; “the quality of decision-making by boards in this area is absolutely critical to achieving adequate retirement outcomes for the members of the funds under their oversight”.

In closing, Rowell emphasized that the APRA expects an unwavering commitment to delivering enhanced retirement incomes for fund members – particularly by trustees. And that the APRA will push strongly for and if necessary, impose higher standards of practice.

Governance is not something boards should take lightly. Wilful blindness will not be tolerated. Directors must understand their personal responsibilities.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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