How NOT to fail the Australian Prudential Regulation Authority’s YFYS spend related performance test

This post was originally published on Finextra

As the Australian Prudential Regulation Authority (APRA) continues to introduce more and more regulation and oversight over the superannuation industry, superfunds are finding themselves having to continually review their processes and policies to ensure that they remain compliant. The latest Your Future Your Super (YFYS) reforms, which came into effect on 1 July 2021 have exposed many super funds to a far greater level of scrutiny over how they manage and spend their members’ money.

While the core focus of the new YFYS regulations is on how superfunds invest their members money; in practice the regulations cover every cent that a superfund spends – including on any operational expenses. As a result, this may be the catalyst the industry has required to take procurement more seriously and shift their focus from making sure that their invoices are paid correctly, to ensuring that every dollar they spend is driving value for members.

In this article I’ll take a deep dive into how the APRA’s latest regulations will impact on the superfund industry’s procure to pay processes, and look at how other industries have dealt with similar levels of scrutiny. We will look at the changes superfunds need to make to ensure they remain compliant, and the questions superfund leaders should be asking themselves to ensure their fund improves its efficiency, transparency and accountability.

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How do the regulations impact Superfund expenses?

A key part of the new YFYS reforms is introducing a best financial interests (BFI) duty on all superfunds:

This reform places the onus firmly on RSE licensees to ensure, and demonstrate, that all decisions are consistent with the best financial interests of their members.” Source: APRA

The exact definition of BFI does not seem to be clear, it’s almost intentionally vague, so how can superfunds protect themselves if they don’t know what the criteria will be? Our running definition, which we apply to any business, is that every dollar spent should have a clear audit trail on where that money is spent and how the decision was made to spend it.

There is another very interesting part of the reforms that relate to superfund expenses:

“APRA…intends to, in the coming months: publish a report on the key findings from the Thematic review of fund expenditure; and collect data on the expenses of each fund on a look-through basis using more granular categories, as part of APRA’s Superannuation Data Transformation program” Source: APRA

Superfunds are going to need to be able to provide auditors with expense data with far more granularity than they used to. Given the number of transactions and suppliers each fund makes daily, without a systematic way to capture this data, many superfunds could find themselves struggling to comply and provide this data on a regular basis.

How serious are APRA about this? Very. Under the reforms, superfunds that fail the APRA performance test are required to write to their members to advise them of the failure and suggest that they move to a different superfund. A humbling activity that 13 superfunds had already had to do recently / since the regulations came into force.

How have other industries handled this level of scrutiny?

Thankfully, there are lessons that can be learned from other industries and companies that have gone through this type of spend scrutiny in the past. Here are two prominent examples:

Government spend – the level of scrutiny over where taxpayer’s money is being spent is understandably very high. Most federal and state government agencies have strict, systematised processes in place to manage their spend. This includes:

  • Strict spend pre-approvals – through purchase orders and highly structured procurement events, government agencies have strong audit trails in place to demonstrate how spend decisions are made
  • Very low thresholds for non-procured spend – many government agencies have put in place low spend thresholds where goods/services can be procured without going through the strict and structured procurement processes mentioned above 
  • All spend processes are systematically measurable and gated – to ensure compliance the procurement process and policies are engrained in the systems that are used to administer them. This gives government departments the relevant approval gates that they need as well as data that can measure and identify spend that occurs outside of these procurement events

Large corporates – we have seen several savvy CFOs and CEOs optimise and self-regulate their finance and procurement processes. These leaders clearly understand that the one thing they truly have in their control is the amount of money they spend, and who they choose to spend it with. Large corporates who have optimised their spend management processes all have unified systems and processes in place, which mandate their procurement policies, for example:

  • They actively measure spend against individual contracts to reduce or remove the risk of contract leakage
  • Any off-contract spend for goods or services is only possible through system-enforced workflows which reduces any non-essential or off contract spend.
  • A strict no purchase order no pay policy with suppliers for the majority of purchases
  • Their whole procure to pay process is systematically measurable, enforceable and follows strict approval workflows.

How mature is the industry now?

According to a recent survey the financial and insurance services industry is lagging behind many of their peers in the enterprise:

  • 83% of Financial and Insurance Services industry businesses assessed answered ‘A little’ or ‘Somewhat’ to the question to what extent do have complete, on-demand visibility over your committed spend/outgoing liabilities.
  • 50% of Financial and Insurance Services industry businesses assessed are unable to measure the percentage of their spend that is pre-approved? (e.g., approved before the invoice arrives)
  • 67% of businesses assessed had a higher overall maturity rating than two-thirds of the Financial and Insurance Services industry businesses assessed.

This data, whilst not conclusive, does suggest that the industry needs to mature how it runs its back-office operations to keep in line with APRA regulations. Based on the maturity of the industry, the survey suggests many superfunds will have gaps in their processes around the following specific areas:

  • A systematic and structured way to ensure their spend meets the BFI duty, because they are not pre-approving that spend via tracked contracts and purchase orders
  • An inability to provide granular level detail for expenditure as they are only categorising spend at an accounting level – which doesn’t provide the level of detail required by APRA auditors.

What questions should a Superfund be asking themselves to ensure they pass APRA’s YFYS spend related performance test?

Whilst Superfunds should be looking closely at their processes to identify whether they are compliant or not, here are some questions that you can be asking yourself to understand the likelihood of whether you have full control over your procure to pay processes and therefore more likely to be able to pass your APRA YFYS spend-related performance test:

Question 1. Do you have real time visibility of your prospective spend prior to the purchasing decision being made?

Visibility implies that you have purchase orders in place which is the starting point to be able to systematically comply with BFI duty

Question 2. What percentage of your spend is on contract vs off contract?

Contracted spend implies that you have negotiated and favourable terms with those suppliers – likely ensuring you meet your BFI duty.

Question 3. What is your contract utilisation percentage for each contract?

Actively managing and monitoring your contract utilisation percentage ensure that you are proactively ensuring you are driving the best deals for your organisation. For example, if the contract utilisation is already over 100% before the contract ends it gives you some leverage to renegotiate your rates.

Question 4. Do you have a centralised, measurable digital audit trail of how new material, major and minor suppliers are selected and onboarded?

Having this in place ensures that you are meeting BFI duty responsibilities around which suppliers you are selecting.

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