When the Financial Accountability Regime comes into force next year, super funds and insurers will come under greater scrutiny and will need to lift their investment governance game. Frontier Advisors and KPMG take a closer look at how to navigate the complexities of governance in a new report
From 25 March 2025, the Financial Accountability Regime (FAR) will come into force for superannuation funds and insurance companies.
This regime will replace the current Banking Executive Accountability Regime, which applies only to banks and was put in place in 2018 following the conclusions of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
FAR applies to all APRA-regulated entities and places greater emphasis on responsibility and accountability frameworks of not only the organisation but also its directors and senior executives.
In the coming months, super funds and insurers will need to take a close look at how FAR is going to affect investment governance considerations and analysis, a new report by Frontier Advisors and KPMG warns.
The report, ‘Navigating the Complexities of Investment Governance – Today and in the Future’, showed that asset owners worry about short termism in the industry and indicated that the implementation of good governance has been complicated by having to view the investment portfolio through too many lenses, including return, risk, peer performance, regulatory benchmarks and ESG considerations.
But when revisiting their investment governance, asset owners need to consider whether their framework takes into account the unique characteristics of their organisation and not simply replicates what others are doing, Sarah Cornelius, Head of Investment Governance at Frontier Advisors and one of the contributors to the report, told [i3] Insights.
“The important thing is that it is fit for purpose. Adopting something that someone else does won’t necessarily translate, because it needs to make sense for their structure and their resourcing,” Cornelius said.
“[The key] is recognising the different challenges and having some sense of priorities and understanding the trade-offs. If you’re really focused on just one aspect, is there a trade-off in terms of giving up something else?
“It is about understanding the trade-offs and understanding priorities, and that comes back to being very clear on your ambition and what you’re trying to achieve.”
High Expectations
Investment governance encompasses a broad range of activities, from fostering a results-driven and inclusive organisational culture to sound unlisted asset valuation methodologies and independent oversight of internalisation activities.
The challenges of governance become greater as organisations grow. For example, a number of super funds have been opening offices overseas and as staff numbers increase across different office locations, in different geographies, it can become more challenging to maintain an established organisational culture.
Bigger teams can also lead to more fragmentation with teams operating in silos, rather than towards a shared outcome.
There are different ways to tackle these issues. For example, one fund might seek alignment and address culture through a total portfolio approach (TPA), while another fund with a large number of portfolios and client types might find that TPA is not appropriate for them.
But most asset owners in the report agreed that poor governance can have a real impact on the end benefit for members and clients.
About 68 per cent of respondents in a survey by Frontier Advisors among 22 asset owners with a total of $800 billion in assets under management indicated that poor governance and associated inefficiencies would reduce the overall performance of an entity by at least 1 per cent per annum, while 82 per cent said it would detract at least 75 basis points.
Keeping in mind that compounding interest works both ways, the authors of the report calculated that a 1 per cent decrease in return could cost a new worker aged 25 more than $500,000 in superannuation over the life of their career.
Good investment governance requires constant maintenance. It isn’t a set-and-forget policy,” Cornelius said.
“There’s been quite an uplift in expectations in investment governance areas from the regulator in recent years. That has been a consistent theme,” she said.
“One of the things that we tried to really draw out in the paper is that in the investment governance space, there is so much going on and there are so many different areas to stay on top of.
“And so it’s really important to kind of regularly reassess, because it is one of those things that kind of needs that continuous development,” she said.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.