APRA moves to heighten risk management standards for super industry

The Australian Prudential Regulation Authority (APRA) has released a discussion paper detailing proposed plans to replace the existing Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114) with enhanced obligations for registrable superannuation entities (RSEs).

The proposed reforms include:

• widening the scope of permitted use of financial resources held to manage operational risks;
• reducing barriers to efficient use of these resources; and
• requiring trustees to adopt a more sophisticated risk-based approach to determining how much to hold.

According to APRA, the proposed changes are aimed at shielding super fund members from adverse RSE operational outcomes.

“Superannuation fund members expect that RSE licensees, responsible for delivering retirement outcomes, will manage the operational risks of the business in a fair, equitable and prudent way. Doing so supports confidence in a trusted and stable superannuation industry,” APRA noted in a statement released to the market on Monday, 14 November.

“It is, therefore, incumbent on each RSE licensee to ensure it has ready access to equitably sourced financial resources to respond to, and rectify, the impacts of these operational risks.”

APRA acknowledged that existing requirements — under section 52(8)(b) of the Superannuation Industry (Supervision) Act 1993 and Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114) — have been “instrumental” in improving standards, but added the newly proposed reforms are a response to “significant industry evolution, supervisory insights and industry feedback”.

The enhanced requirements would be underpinned by a two-tiered model, consisting of:

• a baseline component, to ensure ready access to financial resources to fund recovery or exit activity; and
• an operational risk component, to spread the impact of operational risk fairly across different cohorts of members.

“The enhanced requirements seek to widen the scope of permitted use, adopt a more sophisticated risk-based approach to the level of financial resources and reduce barriers to efficient use,” APRA stated.

“APRA considers that together, these enhancements will better support financial resilience in the superannuation sector.”

The prudential regulator has invited industry stakeholders to provide feedback, tabling submissions by 17 March 2023.

Consultation on the draft standard and guidance is expected to commence in mid-2023.