After major flaws were found in an assessment by the Australian Prudential Regulation Authority (APRA), superannuation institutions are being encouraged to improve their financial contingency planning.(Photo : by Quinn Rooney/Getty Images)
After major flaws were found in an assessment by the Australian Prudential Regulation Authority (APRA), superannuation institutions are being encouraged to improve their financial contingency planning. In evaluating 16 licensees of superannuation funds, the regulator found that stronger and more aggressive controls were required to guarantee that the funds could handle difficult financial circumstances and bounce back.
According to APRA's review, a large number of superannuation funds do not currently have the mechanisms in place to deal with financial difficulties. The over-reliance on successor fund transfers (SFTs) as the main departure option was a recurring problem that was found. Under SFTs, members' entitlements are moved from one superannuation fund to another if a fund has severe financial difficulties. Although this can be a helpful tool, APRA pointed out that it shouldn't be the only tactic used because it restricts the fund's capacity to recover and isn't always a practical choice.
The assessment also made clear that, because of their ownership structure, business style, and ability to obtain outside funding, many superannuation funds have a restricted scope of plausible recovery proceedings. This constraint may make it more difficult for them to quickly rebuild their financial resiliency. In order to lower the risk of financial hardship, APRA stressed the significance of having a broad range of recovery alternatives that can be effectively implemented.
One of the key findings was the inadequacy of early warning indicators and trigger levels within the funds' trigger frameworks. These indicators are essential for detecting potential financial issues early and allowing funds to take preemptive action. APRA suggested that these indicators should be more relevant to the specific operating environment and risk profiles of the funds.
Additionally, APRA criticized the reliance on litigation or insurance claims as potential recovery options. While these can provide financial relief, they are often time-consuming and cannot be credibly relied upon to achieve timely recovery during periods of financial stress. APRA recommended that these options not be included in recovery and exit plans, urging funds to develop more immediate and reliable strategies.
APRA's recommendations focused on encouraging superannuation funds to improve their preparatory measures and enhance their capability to reduce execution risks. This includes developing more robust recovery and exit plans that can be implemented effectively during times of financial distress.
The regulator also highlighted the need for proactive communication strategies to support the execution of these plans. Effective communication with stakeholders, including fund members and regulatory bodies, is crucial during periods of stress to maintain trust and manage expectations.
The review underscores the immediate need for superannuation funds to invest in building the structures and capabilities required to meet the standards set by CPS 190, a regulatory framework that mandates comprehensive contingency planning for financial institutions. APRA has set a deadline of January 1, 2025, for funds to comply with these requirements.
Superannuation funds that fail to address these shortcomings risk jeopardizing their financial stability and the security of their members' retirement savings. By adopting APRA's recommendations and enhancing their contingency planning, these funds can better navigate financial challenges and ensure long-term resilience.
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