APRA confirms its expectations for RSE licensees with Your Future, Your Super reforms

APRA has now confirmed its expectations for Registrable Superannuation Entity (RSE) licensees for the implementation of the Your Future, Your Super (YSYF) reforms in a letter late last week.

One of the recently introduced legislative requirements is for trustees of RSEs to perform the trustee's duties and exercise the trustee's powers in the best financial interests of their beneficiaries.  In its letter to RSE licensees, APRA states that they must already have:

• taken immediate steps to initiate changes to practices where necessary, to meet the new legal obligation (which became effective on 1 July 2021); and
• reviewed internal frameworks, policies and processes to identify and address areas that need to be strengthened in light of the YSYF reforms.

APRA warns that its supervisors are currently engaging with each RSE licensee to understand how it is complying with its new obligations, and will take action if an RSE licensee has failed to respond adequately to the YSYF reforms.

APRA implementation

APRA's letter highlights three core components of its implementation of the YSYF reforms:

1. administering the performance test;
2. enhancing standards on investment governance; and
3. reporting on the findings from a thematic review of RSE licensee expenditure management.

Performance test

The first performance test applies from 1 July 2021 and will be conducted by APRA for MySuper products only, with RSE licensees to be notified of their results by 31 August 2021.  APRA will write to any RSE licensees affected by the application of APRA's discretion to combine historical product performance.

After the first round of assessments under the performance test, APRA intends to engage with RSE licensees considered to be at material risk of failing a second time to understand their plans to improve and their contingency plans if they fail the test twice.  

APRA also expects RSE licensees to manage their investments in the best financial interests of members (which is a higher bar than solely passing the performance test).

Investment governance standards

Alongside the passage of the YSYF reforms, APRA has undertaken a thematic review of industry practices in valuing unlisted assets and reviewed the prudential standards and guidance investment governance, the results of which have identified areas where standards in the industry need to be raised.  In light of the YSYF reforms, RSE licensees need to ensure they can clearly demonstrate how they are managing their investments in the best financial interests of members.

In the coming weeks, APRA intends to:

• publish a report on the findings of the thematic review of unlisted asset valuations; and
• consult on proposed changes to Prudential Standard SPS 530 Investment Governance (SPS 530) and associated guidance.

RSE expenditure management

Lastly, APRA notes that it has recently completed a thematic review of fund expenditure which considered whether certain expenditure was consistent with the sole purpose test, met the duty to act in the best interests of members, and was subject to appropriate oversight and governance. Again APRA has identified a range of industry practices that need to be strengthened, especially in light of the YSYF reforms.

In the coming months, APRA intends to:

• publish a report on the key findings from the thematic review of fund expenditure; and
• collect data on the expenses of each fund as part of APRA's Superannuation Data Transformation Program.