Yes, a super fund does need a business strategy

There’s a general sense that APRA is making life harder for super funds of all stripes, as part of an effort to drive up management and board standards, and encourage industry consolidation.

We’ve written previously about SPS530, which raised prudential standards for investment governance.  Its requirements for an overall investment governance framework, and an investment strategy, due diligence, and monitoring for every investment option, affect every super fund, but creates particular headaches for super wraps, including the new MDIO platforms spreading across the not-for-profit segment.

Looking beyond that, there are the APRA scale tests, part of the Stronger Super reforms.  Boards have to make an annual determination whether their MySuper members are disadvantaged due to insufficient scale – and presumably merge if so.  That said, there are no quantitative criteria, so it is really up to boards to set and assess them.

APRA’s program of raising standards for boards and management teams also includes SPS220, titled “Risk Management”.  As with SPS530 it came into effect in July 2013, so funds have had a year to get used to it.

While most of the standard deals with risk, as you would expect, it also highlights the importance of a fund’s business strategy, both in its own right, and in being integrated with the fund’s risk management framework.

SPS220, which can be found here, specifies that an RSE must have a written business plan that sets out the strategic direction of the RSE’s approach to managing its business operations.  So if there was ever any doubt that super funds are an actor in the wealth management industry competitor landscape, therefore requiring all the skills which go with that, this should dispel it.

Although the discussion of business strategy in SPS220 is not extensive, the intended scope that it should cover is broad.  In essence:

– An RSE must have a rolling 3-5 year business plan, which must consider the entire business.

– The business plan must be aligned with the risk management framework.

– There must be a two-way integration between the business plan and the risk management framework – the business planning process needs to identify risks arising from the RSE’s strategy which need to be fed into the risk management framework; and it needs to consider the risks already identified by the framework,

– The business plan should be reviewed annually by the management team and the results reported to the board.

Some management teams – typically in larger funds – are used to preparing detailed 3-5 year strategic plans for their boards.  This is true of both retail and not-for-profit competitors – large retailers are usually part of the extensive annual strategic planning cycles of their parents, while the larger not-for-profits have built up strategic capabilities over the past 5 years or so.  So for the largest super funds, SPS220 may have limited impact beyond fine-tuning the interaction with their risk management approach.

But for small to mid-sized funds, SPS220 may represent a significant step-up in expectations, again regardless of the type of competitor.  To address it well requires considerably more than a tick-a-box risk or compliance capability.  It implies a sophisticated approach to strategy and interaction across the management team so that strategy informs risk management and vice versa.  This may be challenging for smaller with fewer management resources and less developed capabilities.

Super funds are increasingly complex businesses, whether retail or not-for-profit, even at the small end.  SPS220 raises the bar on strategic planning, which should make every fund review their annual planning process and the resources they allocate to it.  At the big end, it’s another growing pain which is part of being, or becoming, a true financial institution.  At the small end though, it’s yet another increment to the effort and cost of running a super fund, adding to the pressure to lift trustee performance or consolidate.