If there wasn’t already enough commotion following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, there is yet more to come for superannuation fund RSE Licensees (RSELs) with the introduction of SPS 515 Strategic Planning and Member Outcomes.
While timely in terms of the issues coming to light in the Royal Commission, many RSELs will now be trying to develop sufficiently robust member outcomes assessments and to embed these into their strategic planning processes.
With respect to these new prudential requirements, there are three key areas of development, all of which present their challenges.
1) Set the specific outcomes sought for beneficiaries and establish strategic objectives within the Business Plan to achieve them.
The need for articulated member outcomes is aimed at ensuring the coupling of these with the strategic objectives and plans of the organisation, with the aim of ensuring that strategic objectives remain in the best financial interest of members. This would include consideration of the outcomes to members across a range of different aspects including: investment options, products, insurance benefits, scale and expenditure. Noting the SPS 515 requirements for strategic objectives to be specific, measurable and informed by the outcomes that are sought for members, RSELs will need to reconsider how Key Performance Indicators (KPIs) are set and monitored.
Where KPIs and monitoring of business results may have historically been focused on fund-level performance, these new prudential requirements are essentially returning the focus back to the heart of the matter; the benefit to members. And this doesn’t relate only to members as one whole group; RSELs are expected to conduct outcomes assessments on different cohorts of members in order to understand the member benefit and impact at different levels. In conjunction with reviewing KPIs holistically, it would seem that all key strategic initiatives will need to have performance metrics identified upfront covering a number of different layers. When it comes to setting strategic plans, this additional and possibly more cumbersome layer of scrutiny may make decision-making more difficult and less timely.
Adding to the challenge of setting KPIs is the guidance in SPG 516 stating that RSELs should set targets and goals that are overly ambitious, in order to drive improvements. This could potentially lead to a divergence in the shorter term KPI objectives and the longer-term ambitions of the fund. It would be difficult otherwise to convince executives to set KPI metrics that they are unlikely to be able to achieve, for the benefit of motivation while at the expense of realism.
The redevelopment and enhancement of KPIs naturally flows into a need to consider what data should be collected in order to monitor these metrics. SPG 515 provides a basic list of metrics that funds can use as a base for monitoring progress against the Business Plan, but RSELs will need to develop a significantly more robust set of metrics in order to meet prudential expectations. With that comes the potential costs and difficulty of capturing sufficient data for analysis.
Expectations for benchmarking of results also presents numerous challenges that must be overcome; from which benchmarks to use and whether any prescribed benchmark is actually the most appropriate, through to the availability of up-to-date data at the time of the assessment.
Moreover, SPS 515 isn’t just about how one measures and monitors success of strategic initiatives. APRA is also expecting a greater level of scrutiny over general assumptions that are made within Strategic Plans, particularly with respect to budget forecasts. It will no longer be sufficient to simply document assumptions, RSELs will need to justify them with respect to how they are anticipated to impact on members as well.
RSELs may also find themselves needing to revisit how they have documented their risk appetite statements in order to establish a clearer link between strategic objectives and the Board’s stated risk appetite, and to help justify decision-making. While this might present an additional challenge for some funds, it will help to ensure that member outcomes are not achieved through excessive risk taking. Given the pressure on funds to achieve outcomes for members, linking strategic initiatives back to the risk appetite statement is a rather pertinent exercise to keep everyone on track.
2) Establish processes for decision making and monitoring with regards to fund expenditure and, in particular, significant fund expenditure.
RSELs are expected to improve expenditure management in order to ensure and demonstrate that all expenditure is in the best interest of members and the sound and prudent management of the business. In particular, SPS 515 requires RSELs to embed a more rigorous decision-making process with respect to significant expenditure items. This may require a tightening of existing policies for approval of expenditure and will likely necessitate a greater level of monitoring of all fund expenditure and not just expenditure that is determined to be significant.
According to APRA guidance, this ‘significance’ should be defined in reference to the size of the expenditure and whether it is of an extraordinary nature and will no doubt represent different amounts and situations for different funds. Adding to the challenge of determining what is a ‘significant’ expenditure, RSELs are also expected to consider the expenditure related to strategic initiatives and identified projects in a holistic sense. This could prove challenging if some aspects of a strategic initiative are run under business as usual processes and other parts as a defined project.
Difficulties with addressing these requirements for significant expenditure could also arise if strategic plans need to be changed part way through, or where budget estimates proved inaccurate. If upward adjustments in expenditure were to occur part way through a project, it is easy to imagine that this would be viewed negatively on the outcome for members. This could, in time, lead some funds to overestimate costs in order to avoid this negative outcome rather than emphasising cost minimisation at the outset.
3) Conduct an annual outcomes assessment and factor results and learnings from this into future strategic plans.
While it is common place for an organisation to look back on its strategic plans and initiatives and assess how well it has met its desired objectives and to look for opportunities for improvement, the requirement to conduct an outcomes assessment squarely brings the focus back to how the strategic initiatives have benefited members, and how these member benefits can be improved upon.
This analysis will be made easier if there is regular monitoring throughout the year of individual metrics, which can then be supported by the annual outcomes assessment that brings it all together and more directly assesses the results achieved at the year-end against what the fund has set out to do. RSELs may find it challenging, however, to extend analysis of member outcomes beyond these quantitative metrics to wider qualitative aspects of the business, like adequacy of resourcing or sufficiency of policy frameworks.
In addition to considering these inward-looking factors, RSELs will also need to turn their outcomes assessment outwards in order to include comparisons to the performance and products of other funds and relevant benchmarks. To this end, amendments have recently been made to the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2018 (the Bill) by the Senate, allowing APRA to issue regulations specifying the nature of comparable products and benchmarks to be considered in respect of both MySuper products and choice options. Subject to the Bill being passed, RSELs will need to put processes into place to undertake comparisons against the products / benchmarks as specified in due course, to determine if the financial interests of beneficiaries are being promoted by the RSEL.
Similarly, while investment returns will be a critical factor for comparison to demonstrate member outcomes, they should not form the only basis for consideration. This need for benchmarking and measuring up against other funds and products will likely present many challenges with respect to the utility and availability of relevant data.
Annual outcomes assessments also need to consider past results combined with consideration of what is to come, and must be factored into strategic planning. This prompts another question; what is the best time to complete the assessment? One would typically review outcomes at the conclusion of the financial year to which they relate, but this will not be possible given the very clear direction that the Board must consider the results from the outcomes assessment when developing its strategic planning for the coming year/s. Strategic planning based on a 30 June year-end would normally be finalised prior to the end of the current financial year. In this sense, it would be necessary to make a conclusion on the outcome of some strategic initiatives before the end of the financial year to which they relate.
At any rate, RSELs will be able to utilise their existing MySuper scale tests, which may help funds to consider the forward-looking aspect of the outcomes assessment and their ability to continue providing desired outcomes to members. Using this as a basis, RSELs should now be getting on the front foot and taking the time to establish their expanded methodology sooner rather than later so that early changes to KPIs and the collection of data can be made in order to perform the first analysis in 2020.
In an acknowledgement of the challenges that this kind of assessment raises, APRA has not been putting pressure on RSELs to get it right the first time. Many will need to take an iterative approach and continue to improve outcomes assessment processes over time, while entrenching these assessments into their annual strategic planning process.