When super funds don’t terminate poor performers
The absence of clear termination triggers in contracts between superannuation funds and their external providers meant that investment managers are unlikely to be terminated for poor net performance against benchmarks.
That is one of the findings of an Australian Prudential Regulation Authority (APRA) Thematic Review of related party service provision arrangements across the Australian superannuation industry, with the regulator also noting the inadequacy of some legal contracts between funds and their service providers.
The shortcoming has been identified in an attachment to a letter written by APRA to superannuation fund which analysed the outcome of the Thematic Review and the fact that while the overwhelming majority of arrangements were of a satisfactory standard, there were still areas that needed improvement.
Looking specifically at contract management, the APRA Thematic Review found that while legally binding contracts were in place for all service arrangements assessed as material, the standard of these arrangements tended to vary with some lacking important provisions such as termination triggers and rights.
Further, it said that while APRA had observed general improvement in the use of key performance indicators in related party service contracts, there was significant variance amongst the sampled licensees in the adequacy of the criteria, the reporting of performance and the options to address performance issues, including penalty provisions.
“APRA also noted an absence of clear termination triggers in a number of the agreements reviewed,” it said. “For example, related parties providing investment management services were unlikely to be terminated for poor net performance against benchmarks; this was more likely to be managed through negotiation as long as the investment manager was adhering to the mandate (e.g. asset exposure and investment style).”
“Better practice would be to have clear performance-based triggers for considering termination,” the regulator’s analysis said.
Dealing with conflict management, the APRA Review pointed to common instances of conflicts of interest not being properly identified in distribution arrangements with related parties.
The regulator said that particularly with respect to long-standing related party arrangements, some superannuation funds had not been able to demonstrate they had considered alternatives.
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