Assessing Quality Member Outcomes in Superannuation

 

 

On 31 August 2017, Helen Rowell, Deputy Chairman, APRA, issued a letter to all RSE licensees requesting additional focus by Trustees on delivering to members,  “quality outcomes on an ongoing basis“.

‘Quality outcomes for members’,  was described as:

 

 

  • high quality; and
  • value for money

superannuation products and services including;

  • optimal retirement benefits to fund members; and
  • other benefits and services such as insurance,

which should be consistent with a Trustee’s strategic objectives.

Ms Rowell stated that APRA’s supervision had revealed some RSE licensees were failing to provide consistent ‘quality member outcomes’, leading to APRA to question whether these licensees’ business operations were positioned appropriately for effectiveness and sustainability in an increasingly competitive industry environment.

APRA states that its view is that it is insufficient for an RSE licensee to simply comply with their legislative and prudential obligations without giving consideration to how their Funds will deliver quality outcomes for members. APRA requests that existing licensees review and consider whether there is a need to enhance their approach to delivering quality member outcomes and maintaining the future sustainability of their RSE’s.  This would include consideration of whether insurance offerings may be eroding member retirement benefits.

While each RSE licensee should develop its own framework for assessing member experiences, APRA will be using a wide range of metrics to assess member outcomes and future sustainability of RSE products in the future.  APRA will be expecting RSE licensees to establish targets (using relevant benchmarks) and objectives and then measure performance against them. This should include, where like-for-like comparisons are possible comparisons against peer offerings.

The following metrics to be used by APRA have been given as examples:

Methodology for assessing member outcomes and sustainability

APRA has recently conducted an assessment of all RSE licensees under its supervision  and will consider both an RSE’s historical member outcomes, as well as key indicators for future sustainability.  It also incorporates APRA’s supervisory knowledge of the unique characteristics of each RSE and RSE licensee, including APRA’s assessment of the adequacy of governance and risk management frameworks, strategic and business planning practices and business operations.

The metrics for APRA’s assessment of historical outcomes and future sustainability include:

  • net returns, on an absolute basis and relative to risk/return targets;
  • costs per member for MySuper products
  • cost of insurance cover;
  • administration and operating expenses as a percentage of average net assets (operating
    cost ratio);
  • net cash flows as a percent percentage of average net assets (net cash flow ratio);
  • net member benefit outflow ratio;
  • net rollovers as a percentage of average net assets (net rollover ratio)
  • trends in membership base; and
  • active member ratio.

These metrics and trend analysis are derived from data reported to APRA under the new reporting standards introduced in 2013/14.
APRA’s assessment therefore considers whether an RSE’s  measures are:

  • improving,
  • stable; or
  • deteriorating.

APRA’s quantitative assessment of an RSE’s performance considers each of the metrics on an absolute and relative basis as appropriate. Absolute performance is an indicator of both the delivery of member outcomes and future sustainability in the context of the RSE’s circumstances. The relative basis assists APRA to identify outliers, based on the RSE or product ranking for each metric, and in particular to identify RSEs that are in the bottom quartile on a specific measure.

In assessing historical member outcomes of RSEs, APRA has considered net returns relative to return targets of each fund’s MySuper products, operating cost ratios, and insurance costs, particularly the rate at which insurance premiums are likely to have eroded member balances. For funds without a MySuper product, assessing net returns requires consideration of product level information.

When assessing future sustainability of an RSE, APRA considers various measures linked to potential stability or growth in membership and assets as this is relevant to the likelihood that the RSE will be able to deliver quality member outcomes into the future. Key metrics for assessing potential future stability o growth will be:

  • net cash flow;
  • rollover ratios; and
  • membership trends.

reflecting an RSE’s ability to acquire new members and retain existing ones.

APRA’s approach to assessing fund performance and sustainability serves as a starting point only, in a more holistic assessment process that includes qualitative assessments by APRA supervisors.

The qualitative aspect of the assessment captures APRA supervisors’ judgment as to:

  • the robustness of an RSE licensee’s strategic and business planning practices; and

the quality of the RSE licensee’s:

  • governance; and
  • risk management frameworks.

APRA Response and Supervisory Focus

APRA will soon contact each of the RSE licensees of RSEs identified as a result of APRA’s assessment where concerns have been identified to request their respective Boards to meet with APRA to discuss their assessment.

These RSE licensees will be required to develop a robust and implementable strategy to address identified weaknesses within a reasonably short period and to engage more regularly with APRA to monitor the implementation of that strategy. Where it is clear that a particular product or RSE is unlikely to be able to continue to operate in the best interests of its members, APRA expects the relevant RSE licensee to act to ensure a timely and well-managed transfer of members to another suitable product or RSE, either within the RSE licensee’s own operations or those of another RSE licensee.

The full letter including charts based on various metrics used in APRA’s assessment of member outcomes and fund sustainability is available on the APRA website here

 

 

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