APRA review of superannuation trustees related party outsourcing arrangements

APRA conducted the review in an industry-first partnership with Grant Thornton as an external consultant, with APRA acknowledging Grant Thornton’s input into the observations reported.

The review of superannuation outsourcing arrangements covered four key service areas – administration, financial advice, investment management and insurance.

The key observations focused on the following areas:

• Trustees' assessment of service providers' value-for-money;
• Trustees' measurement and monitoring of service providers' performance; and
• Trustees' oversight of service providers.

Value for money assessment

APRA documented that while the current SPS231 standard requires entities to undertake a tender process when selecting or renewing arrangements with service providers, for the most part, trustees instead rely on benchmarking costs and services against an expert’s view of the market. While APRA understands the merits of benchmarking costs APRA found in their review that some trustees tend to scope their benchmarking activities too narrowly, hence missing the opportunity to improve value to members obtained from third party outsourcing arrangements. APRA noted that benchmarking exercises should not solely focus on justifying existing costs and service standards, but rather challenge and question costs and quality of services provided to ultimately derive greater benefit for members.

Performance measurement and monitoring

APRA noted that while the quality of reporting by third-party providers had increased in recent years, Prudential Standard SPS 515 Strategic Planning and Member Outcome requires clearly defined and measured service standards that allows for regular reporting and analysis from third party service providers.

APRA outlined the below as best practice reporting from service providers to trustees:

• Service provider reporting
  • Regular and reliable reporting
  • Comparison of actual performance against tolerance for key metrics
  • Dashboards and scorecards for in depth reporting
• Access and insights
  • Insightful commentary about service quality and issues raised
  • Access to service providers to discuss or raise issues
• Robust governance procedures
  • Clear monitoring, oversight and reporting expectations
  • Established protocols for issues escalations, documented in the trustee’s outsourcing policy

Service provider oversight

APRA identified that while it’s not a legal or prudential requirement for trustees to operate a trustee office, many had chosen to do so to independently manage and oversee outsourcing arrangements, with activities including incident management and escalation, collation of performance reporting, with more timely challenging and influencing of service providers for the benefit of members. This is more likely to be achieved where the trustee office has an appropriate mandate, is sufficiently independent and includes skilled personnel.

A trustee office was also found to minimise the burden on a board or its committees to directly oversight third-party service providers.

The thematic review findings have informed the approach set out in the draft standard CPS 230 Operational Risk Management in relation to third-party services providers.

To find out more about the outcomes of the thematic review or how we can assist the implementation of these or the requirements of CPS 230, get in touch with us below.