Michael Peters

After 21 years of mandatory superannuation there is almost as much money in Australian superannuation accounts as there is in bank deposits.

If you look at the longer term “sticky money” and take out short term bank deposits, then the $1.2 trillion superannuation industry is way in front. By this time next year, superannuation should be streets ahead, by any measure.

This is why it makes sense for APRA to start treating superannuation accounts in some of the same ways it treats bank deposits held in Approved Deposit Institutions (ADIs), and this is one of the key themes of the governance discussion paper released this week by APRA.

In essence, the defining principle of the reforms is that super should be as safe as money in the bank. Superannuation and real estate will soon be Australians’ biggest private investments, so super should not only be as safe as the bank, but safe as houses too.

This is not purely altruistic, of course. Our regulators are terrified at the thought of a financial disaster hitting our superannuation industry. It is a national nest egg which needs an amount of protection, otherwise the impact on the public purse and retirement lifestyles would be catastrophic.

The sagas of Westpoint, Trio Capital, Storm Financial and Opus Prime were well documented but small in scale. If that happened across the industry, though, it would be a tsunami of national disaster.

APRA’s new discussion paper on superannuation governance addresses some of these issues as the regulator prepares to take over the industry from 2013.

Up until now, there’s been very little legislated capital adequacy for superannuation funds, and virtually no liquidity rules and little in the way of regulated transparency. Superannuation has been almost an afterthought for the financial sector.

The concept of operational risk reserves has been completely unknown. Our auditors only look at funds when money goes missing and don’t judge performance in the same way as European regulators “name and shame” poorly performing funds.

The reforms may not go so far as the equivalent of a deposit guarantee on super accounts, but were are heading in that direction. The draft paper is important as it places super at the top of the finance regulatory agenda, so it makes sense that it should be protected by a watertight regulatory regime, and even by a guarantee.

There is little point in Governments changing the rules over the years to make superannuation the nation’s preferred savings vehicle if the regime does not also deliver adequate protection.

There is no doubt that the changes will mean more red tape, more compliance fees, and will further drive the wave of consolidation among the super funds. It will probably also mean less volatility in fund performance. Given the importance of superannuation not just to individuals but the nation as a whole, these are necessary inconveniences.

Less lamented will be the end of the well-known perks enjoyed by fund managers. Most people have no idea of the multi-level fee structures in their superannuation funds. In the 21 years of the mandatory regime, clients have been burned alive.

Accountability for service and performance is APRA’s great challenge, along with minimizing risk. The draft changes show they are up for the challenge.

Michael Peters is a lecturer in Business Law and Taxation at the Australian School of Business at the University of NSW. A version of this opinion piece appeared in the Australian Financial Review on Wednesday 5 October 2011.