In the first of a six-part series on corporate superannuation, Mark Beyer looks at the impact of increased regulation.
AUSTRALIAN companies are voting with their feet. As superannuation becomes more and more complex, companies are closing down their in-house superannuation funds and outsourcing to specialists.
The number of company funds has more than halved over the past eight years to just more than 2,000, ac-cording to the latest data from the Australian Prudential Regulation Authority.
The relative demise of company funds is apparent if we look at the amount of money they manage.
In 1995, company funds accounted for about 22 per cent of all money in superannuation.
In 2002, company funds accounted for only 13 per cent of the total.
The big growth sectors over this period are retail funds, including retail master trusts, and industry funds.
The trend towards outsourcing is expected to continue, judging by recent research by Mercer Human Resource Consulting.
It found that 27 per cent of company funds are planning to move to a master trust in the next two years.
A further 17 per cent are looking to merge with another fund.
“Most corporate funds are re-thinking their future largely because of the economies of scale needed to meet new service benchmarks set by master trusts and the investment required to comply with increasingly complex licensing and regulatory requirements,” said David Anderson, a principal with Mercer.
The Mercer survey also found that funds are looking to outsource specific functions, such as investment implementation (18 per cent) and trusteeship (8 per cent).
Mr Anderson said this was additional to the widespread out-sourcing of administration and member services that already occurred.
The regulatory requirements facing super funds are becoming increasingly onerous.
The latest reforms, announced last October, include a requirement for all trustees of super funds to obtain a superannuation trustee licence.
In addition, all super funds must be registered with APRA prior to accepting contributions.
While this requirement has always applied to ‘public offer’ funds, which are open to the public, it has not applied to company funds.
“We see the licensing power as filling a major gap that has existed in the superannuation supervision legislation,” APRA chief executive Graeme Thompson said.
Mr Thompson expects some funds, mostly smaller ones, will have difficulty in passing APRA’s licence test.
APRA’s executive general manager Charles Littrell said there were three important questions APRA would ask superannuation fund applicants during the licensing process.
First, are all the people associated with the application fit and proper?
APRA’s assessment of this question will be based on past and present business qualifications, track record and expertise.
Mr Littrell offered a revealing insight into APRA’s thinking when he said it wanted to move super fund trusteeship from the realm of “well meaning amateur to a more professional basis”.
The second question is whether the risk management plan for the fund is sound and likely to be carried out.
APRA plans to focus on three areas of risk – investment risk, operational risk, such as fraud control, and agency risk, which relates to the ability of trustees to focus on members’ interests ahead of all other interests.
“Unfortunately APRA sees cases where trustees fail that obligation,” Mr Littrell said.
“This does not mean that they altogether abandon member interests but that they are subordinated to an-other constituency.”
The third key question is whether all outsourcing arrangements are sound.
Mr Littrell said APRA was neutral as to whether a fund outsourced key functions to specialist providers.
“We have no desire to regulate these providers but we may need to assess their suitability with some regularity,” he said.
Mr Littrell also expressed concern about lack of objectivity in letting service contracts to related parties.
He said the risk management plan was the core document in the licence application and in the ongoing super-vision process.
An important change in the superannuation landscape is APRA’s increased willingness to use its regulatory powers.
A local example was its recent decision to replace the trustee of the Perth-based Strategic Capital Superannuation Fund.
APRA identified a series of possible breaches by the trustee, including failure to keep adequate records, failure to undertake an audit by an approved auditor and failure to submit annual financial reports.
The fund was found to have acted as a retail fund and taken contributions from the public even though the trustee was not approved for this purpose.
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