Australian Allocators Wrestle With ‘Clumsy’ Regulation

APRA’s recent regulatory changes have received mixed reviews from superannuation funds.

Illustration by II

Illustration by II

Managing a market downturn isn’t the only challenge facing Australian allocators.

The country’s superannuation funds, which manage assets on behalf of pensioners across sectors, are also facing increased scrutiny and rule changes from their regulator, the Australian Prudential Regulation Authority — with wide-ranging consequences.

“APRA has definitely been on a journey,” said Sonya Sawtell-Rickson, CIO at HESTA. “We still don’t have a clear, agreed-upon purpose of superannuation, and in the absence of that, I think there’s been a little bit of ongoing discussion and noise on what the appropriate use is for these funds.”

At the Milken Global Investment Conference on Wednesday, Sawtell-Rickson, along with David Elia, CEO at Hostplus, and Vasyl Nair, CEO at Mine Super, detailed the challenges that come along with this noise.

The Australian Prudential Regulation Authority, the financial oversight arm of the nation’s government, has actively stated that it wants more super funds to merge — a directive that Institutional Investor previously reported on. The organization has also added a benchmarking law, which requires superannuation funds to undergo annual performance testing using benchmarks.


“No doubt the regulatory environment has driven that consolidation,” Elia said. But in his view, those cost savings really matter. “The reality is that scale — and not just scale for scale’s sake — and the ability to drive leverage has delivered better outcomes for managers,” he said.

While smaller and more boutique funds may be able to tap small, niche strategies, the reality is that they can’t access bigger managers because they can’t write large checks, Elia added. And those big checks matter.

“When you write big checks, you have the ability to dictate the terms,” he said. “The bigger funds outperform more often than not relative to the small funds.”

According to Nair, this reality is complicated for smaller managers. To begin with, the process tends to resemble a takeover process more than a merger. Rather than in-depth negotiations, the result is typically a larger fund absorbing the smaller one into its operations.

Some smaller organizations, naturally, bristle at that.

“Unfortunately, the human condition gets in the way of a merger because humans are selfish,” Nair said. “Having the courage to take your smaller fund to a larger one knowing that there will be job losses, the loss of board not easy.”

While mergers are the most tangible result of APRA’s increased regulatory action in recent years, Australian allocators say that they’re feeling these pressures in different ways, too.

Sawtell-Rickson, for example, voiced concerns about the potential fallout from APRA’s work on the benchmarking regulations. “The objective is sound and positive, but there are risks associated with it in terms of crowding into certain benchmarks, in terms of funds’ willingness to being innovative,” she said. “It could affect your ability to pass the test.”

Instead, she added, superfunds may choose to play it safe with investments, rather than continue to embrace the long-held Australian investment model, which prioritizes infrastructure and direct investments.

Nair also noted that some of the regulation implementations have been “clumsy,” which has made it challenging for an investor to manage through.

“To preface my next comment, they’re just people trying to do their jobs,” he said. “The regulator is regulating more, but they haven’t increased the size of their teams, so the regulation is clumsy.”

He reported receiving late requests and pushed deadlines from APRA as a result of the understaffing and the desire to do a lot of work.

“The funds have started to move beyond the regulatory capacity because they’re growing so quickly,” Nair said. “I think this government has this great opportunity to reset, provide more stability in the system, and start to regulate in a more focused way.”