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KPMG spotlights super's biggest challenges

KPMG has flagged ESG, tax governance, financial crime, adaptive investment operations and regulatory risks as some of its key considerations for the super sector in 2022.

According to KPMG's latest Super Insights 2022 report, last year climate change had fast become one of the top strategic priorities for super fund trustees. This was accompanied by an increasing rate of change regarding regulatory expectations.

One year on, not only has climate change crystalised as a strategic issue but conversations are moving to a broader consideration of ESG issues as drivers of value and risk, KPMG said.

"The momentum behind ESG will continue to grow this year and will continue to have significant strategic and operational implications for all super funds and asset managers. It's our belief that this is not simply a phase in the market but a new economic and operating reality," the consultancy firm said.

In the corporate sector, there is evidence of growing capital investment in sustainability programs. Already 30% of chief executives are looking to invest more than 10% of revenues in sustainability programs in their companies.

KPMG reasons that the fundamental driver of this shift is a change in ESG thinking.

"The industry is moving from a focus on risk management and compliance to consideration of ESG in terms of value creation for all stakeholders, market positioning, member retention and social licence," the report said.

"KPMG is seeing super funds ask deeper questions, requiring holistic and joined up thinking, across varying practice areas."

While the global and domestic ESG continues to rapidly evolve, so to have tax governance and risk management considerations.

KPMG said that the Australian Taxation Office (ATO) continues to pursue its 'Justified Trust' initiative which seeks to embrace the OECD view that tax risk management should be part of good corporate governance.

The initiative identifies the top 1000 taxpayers (large multinational and public companies) to participate in a streamlined review, this includes APRA-regulated super funds.

To achieve Justified Trust in a taxpayer, the ATO seeks objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax.

Consequently, funds will need to work closely with their third-party data providers to ensure clear agreement between the parties on responsibility and accountability for design, implementation and testing of tax data controls.

To meet the ATO's expectations, the report states that large super funds should consider, its ability to demonstrate that it's taken steps to establish processes to manage risks of third-party data inaccuracies and to prove it can provide objective evidence of third-party data tax controls.

"Large funds should already be taking action based on the earlier STAR recommendations from the ATO, particularly in respect of matters for which they received a red flag rating or low/ provisional medium assurance rating," the report prefixed.

KPMG adds that tax matters relating to mergers remain a significant issue and trustee's responses to the retirement income covenant should have regard to how tax impacts retirement incomes.

"Mergers of superannuation funds involve numerous tax considerations, including income tax, foreign tax, state taxes and member tax issues," the report said.

"An array of other tax matters remain which can act as potential impediments to mergers and industry consolidation, including limited tax relief for merger expenses to closing funds, Qualified Person status eligibility under franking credits holding (45 day) period rule, amongst others."

Per the report, a burgeoning of financial crimes prevalence and sophisticated cyber threats is another item super trustees should consider in 2022.

"As a result of persistent financial crime threats and evolving regulation and guidance, there is enhanced requirements for the board, senior management and compliance to have appropriate oversight and demonstrate their financial crime risk management coverage, adequacy and effectiveness," the report said.

"Superannuation funds are continually challenged with improving their risks and operations to prevent loss and to meet developing regulatory reforms and expectations."

By law, funds must consider guidance material disseminated by AUSTRAC that's relevant to identifying, mitigating, and managing money laundering and terrorist threat risks, but KPMG stated that among other things more consideration should be given to recent reports on fraud.

Cyber enabled fraud has been a prevailing threat for funds, criminals have been gaining access to customer information and using it to fraudulently transfer funds out of the super system.

What's more over the last five years there's been a 318% increase in suspicious matter reports.

KPMG states that best practice for funds is to, "ensure their processes and systems regarding information security, customer verification, customer monitoring, transaction monitoring and implemented and assessed as designed, and operating correctly address threats faced."

"To address this cyber threat prevention, fraud and anti-money laundering risks and frameworks are increasingly being considered together."

Meanwhile, concerning adaptive investment operations, KPMG said despite an expectation for every Australian super fund to deliver strong and sustainable net investment returns to members, achieving this member outcome will directly reflect a funds capacity to manage large pools of capital cross several asset classes.

To be successful in delivering strong and sustainable net investment returns, it's also prescribed that funds must compete for access to key investment opportunities.

KPMG explained: "The growth of superannuation funds will have a significant impact on the retirement income landscape, as total pension payments expected to increase to $100 billion by 2040, compared to $30 billion in FY21."

"This system growth requires superannuation funds to consider their investment strategies and governance arrangements."

Specifically, given KPMG's projection of super funds under management (FUM) growth, the consultancy firm stated genuine focus is required on improving access to investment opportunities, addressing mandate capacity, realising economies of scale and enhancing internal capability.

For funds, KPMG believes it will be critical to maintain robust investment governance arrangements, continue investments in contemporary portfolio management and optimise custody arrangements of investment data.

"Superannuation fund trustees and the fund's executive management teams will need to lean in transformation change in earnest in the coming years," KPMG said.

"A key starting point must be for superannuation funds to consider whether their current investment strategy can deal to the issues of today whilst appropriately enabling the change and investment in capability needed to be viable tomorrow."

Of a similar tone, APRA has said it's looking for 'transformation by action' across the super sector. The regulator super policy and supervision priorities introduced themes of 'protected today' and 'prepared for tomorrow' with respect to making decisions in members' best financial interests.

APRA has identified the need for more actions is needed to improve explanations of how specific objectives to support member outcomes link to the Business Performance Review findings, plus more vigorous analysis of drivers of business performance.

In KPMG's view, the key to success in this respect is developing a strong governance framework across the strategic/business planning process. This enables trustees to demonstrate how actions from the Business Performance Review are driving decisions to measurably improve outcomes for members.

"This level of agility in the decision-making process, as well as the more sophisticated approach to stress testing and scenario analysis demanded by APRA, will, require an uplift to processes, tools and resources employed by many trustees," KPMG upended.

The report subsequently addressed unacceptable product performance. KPMG claimed that an uptick in supervisory intensity on product performance via the annual performance test and 'heatmap' reporting had indeed resulted in trustees improving outcomes for members through fee reductions and better investment performance.

Read more: KPMGATOSuperannuationESGAPRAOECDNathan KesseyMark SpicerJohn MoutsopolousJames SpenderDamian RyanBernard FinneganBen MeagerSue BradfordMatt O'KeefeNatasha TodescoPlaton ChrisDavid BardsleyBharard SwaminathanRyan LeonardAndrew MaudsleyIan TraceyTrish MatthyszStuart Watson