5 minute read
The Australian Prudential Regulation Authority (APRA) has finalised revisions to the Prudential Standard (SPS 515) and Prudential Practice Guide (SPG 515) – Strategic Planning and Member Outcomes, reinforcing a Registrable Superannuation Entities (RSE) duty to act in the best financial interest of members.
The changes aim to improve member experience by putting members at the forefront of decision-making while also introducing governance measures to ensure all Australians can continue to receive long-term financial benefit through our world leading retirement system.
This major change is timely, due to the sensitivity of this topic in the current environment, expenditure management. APRA has raised the bar on the expectations of how spending should be managed to ensure alignment with the Best Financial Interest Duty (BFID).
APRA’s Push for Expenditure Transparency – Shining a Light on Spending
Fund expenditure has been an intensified area of focus in both the hallways of the regulator and in Canberra. APRA earlier this year confirmed it will publish detailed expenditure data that will provide details on the breakdown of granular expense categories for each fund this month, August 2024.[1].
“Fund expenditure is a significant area of focus for APRA and the broader community. In addition to tightening the obligations under SPS 515, APRA is now collecting, analysing and will be publishing detailed expenditure data at a fund level…” Margaret Cole, Deputy Chair
The loudest voice lobbying for these changes has been Federal Opposition Senator, Andrew Bragg, who has been critical of payments to unions by super funds for several years, regularly grilling APRA’s leadership team during Senate Estimates, ensuring these payments remain on their supervisory radar.
Bragg will feel vindicated with recent events surrounding the CFMEU coming so abruptly into the public eye, and APRA on 14 August 2024, imposing licence conditions on CBUS and BUSSQ around their expenditure decisions in relation to CFMEU payments.[2]
Bragg has regularly highlighted that while many of these union payments may be for legitimate purposes, such as director fees for union representatives who sit on industry fund boards, it was not immediately clear what the remaining amounts paid were in respect of, and whether these arrangements were in the best financial interests of members.
These payments are not solely for ‘directors fees’. This is an illegal scheme designed to siphon retirement savings from super funds to the unions…” Andrew Bragg
From review of publicly available Australian Electoral Commission (AEC) data, approximately $7.05 million was paid by all super funds to unions in FY23, and while these numbers are trending in a downward direction with $10.05 million spent in FY22 and $12.27 million in FY21, these are still significant outflows from super funds each year.[3]
CBUS and BUSSQ specific payments to the CFMEU – AEC reported figures, see below:
Fund | 2022 | 2023 |
CBUS | $900,929 | $1,087,762 |
BUSSQ | $334,303 | $361,713 |
While the media push has clearly played a factor in the events earlier this week, APRA has been on the record in the past two years confirming that formal investigations into payments to unions have been on-going and given the latest action, it can be safe to assume this is just the beginning. [4]
To be prepared for the new regulatory normal, it is important RSEs are “SPS 515 fit”, reviewing their existing frameworks and systems related to expenditure management, considering the five principles relating to fund expenditure:
FOUNDATIONS
Get your foundations right. APRA included a list of non-exhaustive expenditure examples unlikely to be considered justifiable under BFID. These included “political donations, payments to related parties that are not arms’ length, or sponsorship and marketing that does not have a clear financial benefit to members…”. RSEs who are currently incurring these expenditure types should seriously consider whether the regulatory scrutiny that may come with making these payments are worth it. Further, if there is an intention to continue these types of expenses in the future, conducting monitoring and maintaining supporting justificatory evidence is extremely important to ensure any regulatory enforcement risk is (somewhat) mitigated.
FRAMEWORK
A fit for purpose Expenditure Management Framework should be developed (or updated). Decision-making and monitoring should be streamlined at the framework level, not all decisions need to be lengthy assessments – if a quicker process can be agreed for routine or non-discretionary expenditure, including defined expenditure types which fit under this category (e.g. staff wages), there will be less practical burden.
DECISION MAKING
RSEs will need an agreed approach to the justification and documentation of evidence (i.e system) that expenditure is in best financial interest of members. RSEs will also need to demonstrate how spending aligns with strategic objectives and agree metrics to measure performance against. Be prepared for the regulator to request documented evidence of spending decisions – outliers will receive a “please explain” under the reverse onus of proof (i.e. you are guilty until you are not, so prove you are not).[5]
MONITORING
Monitoring needs to be developed over expenditure effectiveness, including at a minimum: whether expenditure is meeting the intended benefits and strategic objectives agreed at decision-making. The previous SPS 515 allowed for overarching monitoring metrics for entire projects or initiatives, however the updated guidance, specifically paragraph 33, provides for new concepts, outlining a more proactive approach to expenditure monitoring
OVERSIGHT
RSEs should consider board level engagement, and the extent thereof in relation to their approach and risk appetite to expenditure management. The updated guidance suggests that, as best practice, RSE licensees may consider having relevant senior management attest to meeting BFID requirements when approving expenditures.
RSEs should also begin the process to identify their nominated accountable person for expenditure, developing their accountabilities and reasonable steps under the Financial Accountability Regime (FAR) in advance of 15 March 2025.
Luke Smailes is the Director of Risk Strategy and Technology at Battleground. He has recently been engaged by APRA as a Stream Lead of the Superannuation Data Transformation Project leading APRA’s regulatory strategy to expenditure management. He was also a consulted party in the development of recently released regulatory reforms, most notably SPS 515 (Member Outcomes) and CPS 230 (Operational Risk Management).
For more information on our SPS 515 service offering, speak to Luke today.
Download the guide
Member Outcomes
[1] This will include detailed categories such as director remuneration, profit on payments to related connected entities and recipients of payments to industrial bodies in relation to promotion, marketing or sponsorship arrangements. Superannuation Data Transformation Publications and Confidentiality Response, Australian Prudential Regulation Authority, Accessed July 22, 2024
[2] CBUS and BUSSQ are each required to engage an independent expert to conduct a review in relation to the requirements under SPS 520 (Fit and Proper) and the trustees’ compliance with the duty to act in the best financial interests of beneficiaries of the funds in making expenditure decisions. APRA also intends to require CBUS and BUSSQ to publish these reports
[3] Australian Electoral Commission. “AEC Transparency Register.” Accessed August 15, 2024.
[4] “… APRA will review the data to ensure spending aligns with the best financial interests of members, and will follow up trustees with outlying discretionary expenditure.” Margaret Cole, Deputy Chair
[5] Schedule 3, Treasury Laws Amendment (Your Future, Your Super) Act 2021 (YFYS).
