Superannuation governance challenges for FY21

Tuesday, 28 July 2020

Tim Bednall, Nathan Hodge & Sarah Yu photo
Tim Bednall, Nathan Hodge & Sarah Yu
King & Wood Mallesons

    A continued focus throughout FY21 for superannuation trustees and APRA will be governance, culture, remuneration and accountability. This will bring both challenges and opportunities for superannuation trustees and directors. Here we look at some of the governance issues directors are likely to face this financial year.

    Superannuation trustees and APRA will continue to focus on governance, culture, remuneration and accountability in FY21. Below is a sample of superannuation governance issues that are likely to demand directors’ attention this financial year (although we note that the timing of many of these issues will depend on the Australian economy’s ability to recover from COVID-19):

    1. Annual Members Meetings (AMMs)

    A trustee of a superannuation fund will be required to notify members of an AMM by 31 December 2020 and hold the AMM by the end of March 2021 (assuming that the 2020 year of income for the fund ends on 30 June). Members must be given a reasonable opportunity to ask questions about the fund to its superannuation trustee, senior executives, auditor and actuary. If a responsible officer, auditor or actuary is asked a question, they must answer the question in the AMM unless it is not reasonably practicable to do so. In which case, it must be answered within one month of the meeting unless an exception applies, for example if answering the question would result in detriment to the members of the fund as a whole.

    Some superannuation trustees have been trialling AMMs prior to the commencement of regulated AMMs. Anecdotal information suggests that they have not been well attended.

    With the legislation providing no guidance, we recommend that superannuation trustees strategically consider what they would like an AMM to achieve – will it be a mere compliance meeting or does the trustee want to engage with the membership base? The answer to this question will drive some of the operational issues associated with AMMs.

    At a minimum, we consider that directors and senior executives who attend and are required to answer questions will need to be briefed and trained before doing so (with learnings from AGMs being able to be applied). Other issues that will have to be thought through, include:


  1. how to answer questions in the context of a fund with different Divisions, benefit designs and confidential arrangements with employer sponsors;
  2. the appropriate forum for these meetings (electronic or in person);
  3. operational aspects of providing members with the opportunity to ask questions, as well as triaging and answering those questions, including selection of on-line meetings facilities; and
  4. whether AMMs will be used an opportunity to ask questions of members and obtain their feedback.


    Boards will also need to be prepared for questions from activists (e.g. regarding ESG policies and investment in particular companies and sectors), as well as members attempting to reopen complaints. Guidelines for the types of questions that will be permitted should be circulated prior to the meeting to ensure that proceedings are not sidetracked.

    2. Board composition

    Although the long running and politically charged debate around the number of independent directors on Boards appears to (at least temporarily) have subsided, we expect that APRA will continue to focus on Board composition and skill sets that are available to guide a superannuation trustee.

    We recommend that trustees continue to review their Board composition policies and implement them appropriately to ensure (and to be able to demonstrate to APRA) that their policy is “fit for purpose” and that the Board has the appropriate skills and experience available to supervise the execution of the trustee’s strategy and ensure it is in the best interests of members. APRA has recently indicated that it will be assessing the robustness of superannuation trustees’ approach to assessing Board effectiveness and it is likely to name those entities selected for review and provide examples of specific practices employed by these entities.

    3. Financial Accountability Regime (FAR)

    Although the details and timing of the commencement of FAR (the superannuation equivalent of banking sector’s BEAR) are uncertain, accountability remains a key focus for APRA. One of the emerging themes from APRA’s governance, accountability and culture review is that accountabilities are not always clear, cascaded and effectively enforced. We understand that Treasury is considering the submissions made in response to its consultation on FAR and there may be refinements to what was initially proposed, which was more onerous than recommended by the Financial Services Royal Commission.

    We recommend that trustees take the delay of FAR as an opportunity to review their existing accountability framework, so that when FAR is enacted they are able to (if necessary) adapt the framework to not only ensure that it complies with the legislation, but is also optimal for the trustee’s business model.

    4. Culture – crises and risks

    Compliance issues are part of doing business and will continue to occur . A recent Federal Court decision of ASIC v CBA [2020] FCA 790 is a warning for superannuation trustees about ASIC’s potential enforcement in relation to perceived cultural problems if compliance issues are not responded to appropriately when they arise.  ASIC asked the Federal Court to find that a failure to identify compliance issues over a 10 year period indicated that CBA’s corporate culture was not conducive to compliance. The Federal Court rejected this and held “the better measure of CBA’s prevailing culture is how it responded when the problem was identified … CBA’s early potential and significant breach notifications to ASIC, its remediation program and its system changes point against a significant corporate culture problem”. We recommend that superannuation trustees plan for how they will respond when a compliance crisis occurs.

    Risk culture will also remain a focus for APRA throughout FY21, with plans to “build a supervisory program to sharpen focus on regulated entities’ risk culture” which will be used to benchmark risk culture. We suggest that superannuation trustees get ahead of this regulatory activity.

    5. Risk management

    Following APRA’s Information Paper on industry self-assessments into governance, accountability and culture, one continuing theme will be APRA’s focus on non-financial risks. APRA has identified a range of issues including resourcing gaps (particularly in compliance functions), blurred roles and responsibilities for risk, and insufficient monitoring and oversight.  

    We recommend that superannuation trustees continue to focus on risk management systems and tools, especially in relation to non-financial risks: culture, conduct, compliance, climate, and cyber-security (the 5 C’s). Following APRA’s mandated increase in capital requirements for banks (to make them ‘unquestionably strong’) and life insurers (relative to their individual income disability insurance exposure, to ensure “appropriate focus” on meeting APRA’s expectations), we would not be surprised if APRA used the regulatory lever of increasing the ORFR capital for superannuation trustees that fall short of APRA’s risk management expectations.

    6. Business plans

    Superannuation trustees will need to ensure that the business plan that supports the trustee in achieving the outcomes it seeks for its members and the sound and prudent management of its business operations, remains sound, in light of the dynamic regulatory environment. Challenges for superannuation trustees’ business plans include:


  6. the impact on liquidity and investments as a result of the COVID-19 early release provisions, when coupled with the Protecting Your Super fee caps;
  7. the regulatory landscape increasingly moving from the “buyer beware” model (where members bear the risk of an unsuitable product) to the “seller beware” model (where trustees bear more of the risk associated with an unsuitable product), as well as a range of regulatory tools that currently (or will shortly) exist, including member outcomes, the design and distribution obligations, ASIC’s product intervention powers, and the directions powers of both APRA and ASIC; and
  8. the impending retirement incomes report that may require trustees to consider potential changes to the regulation of retirement incomes (including any recommendations to include a retirement incomes covenant in the seemingly ever expanding and increasingly prescriptive section 52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act)).


    7. Possible insolvencies

    One risk that superannuation trustees with little trustee capital will have to grapple with is the risk of insolvency and therefore becoming a disqualified person and no longer being able to act as a superannuation trustee. This risk has been heightened by the trustee and director covenants in sections 52 and 52A of the SIS Act becoming civil penalty provisions (for which a superannuation trustee or director cannot be indemnified out of the assets of the superannuation fund) and the proposed legislation to narrow a trustee and director’s right of indemnity from the assets of the superannuation fund, to prohibit indemnification in respect of any penalty imposed under any Commonwealth law.

    APRA has already identified this risk and has indicated that it is strengthening its ability to deal with possible entity failures.

    This will be a risk for some superannuation trustees and an opportunity for others.

    8. Mergers

    Mergers will continue throughout FY21 with APRA’s continued focus on member outcomes. Governance throughout the merger process and the governance design of the merged funds should be carefully managed by superannuation trustees, to ensure that they continue to discharge their duties in a sound and prudent manner (including appropriately managing risks and addressing conflicts of interest) including realistic assessments of the costs of the merger process and the time required to execute it.

    9. Sole purpose test

    The sole purpose test is central to the regulation of superannuation funds. APRA plans to undertake a long overdue review of its guidance on the sole purpose test, which was issued nearly twenty years ago. This is a key governance issue that will shape the role of the superannuation industry for members and broader society and will need to address complex issues, such as spending fund money for broader societal benefits that will ultimately financially benefit members through enhancements to a fund’s reputation and brand. 

    The Government has already shown its preparedness to use superannuation to bolster the Australian economy through the COVID-19 early release measures. We wonder whether APRA will likewise signal that the superannuation industry can play a broader role in dealing with social issues while acting consistently with the sole purpose test, as a result of measurable increased funds under management through benefits to a fund’s reputation and brand. Superannuation trustee directors will need to carefully review APRA’s guidance for opportunities and threats.

    10. Superannuation trustee service becoming a financial service

    Draft legislation has proposed that a “superannuation trustee service” will become a financial service. This means that all superannuation trustees will be required to hold an Australian financial services licence (AFSL) authorising it to provide “superannuation trustee services”. Such services cover all activities involved in operating a superannuation fund, such as fee charging practices, investment selection, product changes, oversight of service providers, insurance claims handling, and transfer, payment and rollover practices. This will also mean that all aspects of a superannuation trustee’s operations will be subject to the AFSL duties, including the requirement for an AFSL holder to do all things necessary to ensure that the financial services covered by their licence are provided efficiently, honestly and fairly.

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