I seem to have spent a lot of time recently reminding people of the virtues and strengths of Australia’s superannuation system in the face of doubts and questions raised by the Productivity Commission and others. In doing so I fear I have not given enough credit to the regulator with primary responsibility for the stability of the system, the Australian Prudential Regulation Authority.
The Productivity Commission’s draft report has drawn attention to the roles of the two main regulators, ASIC and APRA. And while it has raised some valid questions about jurisdiction, it has also triggered a rather negative debate about responsibility, in particular APRA’s, for the supposed failings of the superannuation system.
Like any good regulator APRA can become a victim of its own success through what is best described as an ‘expectations gap’. People have a general tendency to take success for granted and concentrate on failure and increasingly high expectations can result. It is also easy to lose track of what an organisation like APRA is meant to do and misjudge its remit. A common misconception is to assume that the regulator is a bloodhound snooping around through the weeds and the rushes to retrieve its quarry rather than a watchdog which maintains a watchful eye and barks to keep danger at bay.
In my view APRA is clearly a watchdog and should be judged accordingly. First, it should not be held to account for the architecture of the system. The architect of the superannuation system is the government who is responsible for the shape, style and structure of the Australian superannuation edifice. Second, APRA can’t be held responsible for trustees exercising judgment about strategic, business and investment decisions within the architectural constraints. What APRA should be judged on is the level of the system’s stability and the quality of the processes trustees adopt to deliver on their commitments.
Let us quickly review what has occurred under APRA’s watch. Fees have been falling (overall from 1.4 to 1 per cent over the last 15 years), the number of funds has reduced significantly (as of the end of March 2018 the number of APRA regulated funds had reduced by one third over the previous five years) and that consolidation is continuing, and with the exception of HIH and to a lesser extent Trio there have been no fund failures or corporate collapses. Most importantly, the system emerged largely unscathed from the global financial crisis especially when compared with financial and retirement systems overseas. While the ‘architecture’ has also contributed to these achievements any outside observer would regard this as a success and acknowledge APRA’s role in it.
It is also worth remembering the breadth of APRA’s responsibilities and activities. In the superannuation field alone, APRA maintains around 40 prudential standards and practice guides and a similar number of reporting standards; it collects and publishes quarterly and annual performance statistics which are of enormous value to the industry and its members; it manages large projects with the most recent example the replacement of the D2A platform; it consults regularly with the industry and—not to forget its bread and butter—it maintains a regime for the direct supervision of funds. Of course it also engages in similar activities for general, life and private health insurance and authorised deposit-taking institutions.
While hypothetical or alternative realities should be approached with extreme caution I think it is reasonable to add one of my own: What would the last 20 years have been like if APRA had not been established as a principles-based regulator with primary responsibility for the stability and soundness of the financial system?
Broadly, we might have ended up more like Europe and the US with their slow and occasionally traumatic recovery from the global financial crisis. And in superannuation specifically there may have been much slower progress and improvement in standards and performance which would have led to lower retirement benefits.
APRA has done a good job. It has strengthened the financial system and has fostered higher standards in superannuation. We have not agreed with everything they have done and I am sure we will not always agree with them in the future. However, as we are prompted to look ahead and the potential reform of the superannuation system, we should recognise the system’s benefits as a starting point; and one of those fundamental benefits is APRA and the role it plays.