corrs
in
brief
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
Following the Assistant Treasurer and Minister
for Financial Services and Superannuation’s
announcement that APRA is to be given
prudential standards-making power for
prudentially regulated superannuation entities,
APRA has released for consultation a discussion
paper outlining APRA’s proposals for prudential
standards in superannuation.
This In Brief summarises the intended operation of APRA’s
standards-making power and some of the more important
issues that APRA proposes become the subject of a
prudential standard.
NEED TO KNOW
• The new prudential standards-making power in the
Superannuation Industry (Supervision) Act 1993 (SIS
Act) will provide APRA with similar powers in relation to
superannuation to those it has under the Banking Act 1959,
the Insurance Act 1973 and the Life Insurance Act 1995.
• The discussion paper introduces APRA’s proposed approach
to implementation of these prudential standards and
ancillary guidance.
• The new proposals are significant and every fund will need
to consider how the new standards will apply to them.
Bringing superannuation into line with banking
and insurance
The new prudential standards-making power in the SIS
Act will provide APRA with similar powers in relation to
superannuation to those it has under the Banking Act 1959,
the Insurance Act 1973 and the Life Insurance Act 1995.
Standards are legislative instruments
Under the banking and insurance regimes APRA can make
standards relating to prudential matters that are "legislative
instruments".
While prudential standards are laid before Parliament they are
not passed by the Parliament. Instead, a motion to disallow
the instrument can be made within 15 sitting days and, unless
disallowed, the instrument takes effect as subordinate legislation.
This is a power which APRA has long argued it needs for
supervision of superannuation funds, to give APRA the
flexibility to adjust prudential requirements to reflect industry
developments and trends without the need to amend the SIS
Act or Regulations.
Impact on superannuation prudential regime
Until now the absence of a prudential standards-making power
in superannuation has meant that a number of prudential
requirements are located in legislation and regulations.
• The new prudential standards will apply to RSE licensees
regardless of whether they offer MySuper products, choice
products or both. The prudential standards will not apply to
SMSFs or exempt public sector superannuation schemes.
APRA prudential practice guides and other APRA guidance
material do not have legislative force.
• Submissions on the proposed prudential standards must
be made by 23 December 2011.
• primary legislation – SIS Act (high level obligations,
definitions and enforcement powers);
• APRA expects to release draft prudential and reporting
standards, reporting forms and instructions in early 2012.
• subordinate regulation – regulations and prudential
standards (detailed requirements); and
• The prudential standards are expected to be finalised during
2012 for commencement in 2013.
• guidance material – prudential practice guide (supporting
primary and subordinate material).
www.corrs.com.au
6179910
NEW APPROACH
Under the new framework a three-tiered approach similar
to other APRA regulated industries will apply:
MAKING BUSINESS
SENSE
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
APRA proposes to:
• bring those prudential requirements currently located in
legislation and operating standards into the prudential
standards; and
• conduct a review APRA’s suite of Prudential Practice
Guides, circulars, letters and frequently asked questions
in relation to superannuation and incorporate some nonenforceable guidance into enforceable prudential standards
where APRA believes the content should be mandatory.
Material that APRA believes should remain as guidance will
still be in prudential practice guides.
GOVERNANCE
Prudential Standard SPS 510 – Governance
Independence
of directors
APRA will however introduce by way
of guidance a broader definition of
“Independent director” to apply in the
context of equal representation.
Independence
of the chair
PROPOSED NEW STANDARDS
APRA intends to introduce prudential standards covering
topics common to other APRA-regulated industries as well
as superannuation-specific topics. This means that some of
the prudential standards applying to superannuation will be
harmonised with other APRA-regulated industries, where
appropriate.
There will be no prudential standard
requiring a minimum number of directors.
No prudential standard the chair be
independent.
APRA will suggest by way of guidance that
consideration be given to an independent
chair.
Tenure
No prudential standard as to a maximum
tenure for directors.
RSE licensees must however have a board
renewal policy that:
APRA’s current thinking in this regard is set out in the table
below:
• defines an appropriate maximum
tenure term;
Prudential standards extended to the superannuation
industry from current banking and insurance prudential
standards
• states how the board will remain open
to new ideas and independent thinking
while retaining adequate expertise;
Governance
• considers whether the period of service
of a director could reasonably be
perceived to materially interfere with
their ability to act in the best interests
of beneficiaries; and
Fit and proper
Outsourcing
Business continuity management
• specifies the process for appointing
and removing directors.
Risk management
Audit related matters
Where a RSE licensee considers a director
should serve a term longer than the
maximum stated in the policy, the board
must be able to demonstrate to APRA why
this is appropriate.
Prudential standards specifically for superannuation
Investment governance
Conflicts of interest
Defined benefit funding and solvency
Insurance in superannuation
Transition to MySuper
PAGE 2
Board
assessment
Maintain formal procedures for completing
a regular (at least annual) independent and
objective assessment of performance of
both board and individual directors.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
Board audit
committee
Have a board audit committee, comprising
only non-executive directors of the RSE
licensee.
Fit and proper
Specify action to be taken where a person
is assessed as not fit and proper after
their appointment.
Chair to be a person other than board
chair, unless the chair is the sole
independent director.
Undertake annual assessment of all
responsible persons.
APRA expects that if a board has one or
more independent directors, the board
audit committee should include at least
one of these directors and the chair
should be an independent director.
Undertake a separate assessment as to
whether the board has the collective skill set.
Report to APRA about both fit and proper
and board skill assessments.
APRA expects at least one member to
have financial, auditing or accounting
qualifications, skills and relevant experience.
Board
remuneration
committee
Remuneration
Policy
Establish and maintain a board
remuneration committee consistent with
CPS 150.
Internal audit
Chair must be a person other than the
chair of the board unless the chair is the
sole independent director.
Subject to APRA’s approval, it may be
appropriate to outsource the internal
audit function.
As a minimum, scope is to certify all policies,
processes and controls as complying with
APRA’s prudential requirements.
Have a remuneration policy that covers the
requirements in CPS 510 and the same
parties, as well as non-executive directors.
Publish the remuneration of responsible
officers to ensure beneficiaries and key
stakeholders have the same type of
remuneration information as is available
to shareholders of listed companies.
Extend the definition of ‘responsible
officer’ to include a director, individual
trustee or “senior manager”, auditor
and for defined benefit funds, an actuary
appointed by the RSE licensee.
Responsible persons must have the
appropriate skills, experience and
knowledge to manage a fund and be
reasonably expected to act with honesty
and integrity.
PAGE 3
Prudential Standard SPS 310 – Audit requirements
Members must be non-executive directors
of the RSE licensee.
Prudential Standard SPS 520 – Fitness and propriety
Responsible
person
Consider the criteria APRA includes in
SPS 520.
Have an internal audit function that
is appropriate to the nature, scale
and complexity of the RSE licensee’s
operations.
Publish the remuneration policy in the
public section of the fund’s website.
Publication
remuneration
of responsible
officers
Document a fit and proper policy and
processes for assessing and taking action
on fitness and propriety.
CONFLICTS OF INTEREST
Prudential Standard SPS 521 – Conflicts of interest
Framework
Develop and maintain a conflicts
management framework that includes
a comprehensive system of internal
controls and reporting.
Conflicts
management
policy
Establish a conflicts policy that includes
adequate measures to address a RSE
licensee’s key obligation of identifying
and managing conflicts.
Register of
duties and
interests
Establish a register of all duties (both
of the RSE licensee and of its individual
directors) and another of all material
interests (including gifts, emoluments and
benefits) of individual directors and senior
management and disclose to APRA on
request.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
Tied service
provider
arrangements
Only use a related service provider when
a wide range of potential providers has
been considered and it is determined
that the related service provider offers a
service that best reflects the interests of
the beneficiaries.
OUTSOURCING
Prudential Standard SPS 231 – Outsourcing
Harmonisation
with CPS 231
RISK MANAGEMENT
Under CPS 231 APRA must be notified
after an entity enters into an outsourcing
agreement of significant problems in the
arrangement and where the arrangement
is terminated, about the transition
arrangements and future strategies.
Prudential Standard SPS 220 – Risk Management
Risk
management
framework
Develop a risk management framework
that includes, but is not limited to:
• A Risk Management Statement (RMS)
(and if the RMS does not cover the
risks of a particular fund, a Risk
Management Plan for that fund);
• Board-approved risk management
policies, controls and procedures to
identify, assess, monitor, report on
and mitigate all material risks;
• Board approved business plan;
• Clearly defined responsibilities and
reporting requirements for managing
risks; and
Prior consultation with APRA is
necessary before entering into any
offshoring agreement involving a material
business activity.
Application
to investment
management
and insurance
Arrangements with investment managers
and insurers will be subject to the same
obligations as the outsourcing of a
material business activity.
Outsourcing
policy
Board must approve an outsourcing
policy which sets out its approach
to outsourcing of material business
activities and the change to the risk
profile of the fund that arises from
outsourcing the activity to a related
body corporate and how this changed
risk profile is addressed within the risk
management framework.
Written and
legally binding
All material outsourcing agreements
must be made in a written, legally
binding agreement.
Due diligence
Undertake a due diligence review of the
chosen service provider after a tender or
other selection process.
Monitoring
Establish procedures for monitoring
performance under the outsourcing
agreement on a continuing basis, including
regular contact, service level criteria.
Contingency
Develop contingency plans that would
enable the outsourced business activity
to be provided by an alternate service
provider or brought in-house if required.
• A process for regular review to ensure
risk management framework remains
effective.
Articulate risk
appetite
Articulate risk appetite as part of an RSE
licensee’s risk management framework,
at both the fund operation level and for
individual risk.
Risk
management
within business
strategy & plan
Include, as part of the business planning
cycle, the identification and consideration
of risks.
Risk of
ownership
structure
Specifically consider, identify and
address any risks arising from ownership
structure or from inherent conflicts.
Risk
management
function
Maintain a specific function with direct
responsibility for the management and
oversight of risk management within
the RSE licensee. (The function can
be outsourced provided it provides the
necessary oversight of the risks).
Attestations
Board to provide annual risk management
declarations to APRA.
PAGE 4
The starting point of the new standard
will be Prudential Standard CPS 231
which applies to authorised deposittaking institutions and general insurers.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
INVESTMENT GOVERNANCE
Prudential Standard SPS 530 – Investment governance
Align
option with
investment
philosophy
Set clear investment objectives that align
each investment option with the investment
philosophy of the RSE licensee.
Articulate
investment
objectives
Articulate an expected return objective,
risk objective and a relevant benchmark
for each option.
Monitor
objectives
Maintain and monitor objectives on an
ongoing basis.
Articulate
selection
processes and
criteria
Articulate the processes and criteria
used to select investments and
implement options.
Understand
risk
Have the ability to understand and
explain to beneficiaries the fundamental
risks posed by any investment option.
Processes
Document processes and criteria for
ongoing monitoring of each investment
in each investment strategy.
Cost impacts
Consider how investment costs will
impact on fund returns to beneficiaries
over time.
Liquidity
Consider the liquidity risks of assets and
the alignment of these risks to cash flow
needs of an investment option.
Trading and
valuations
Consider, at a minimum, the frequency
of trading of assets, the independence
of and integrity of the provider of the
valuation and the suitability of any
valuation model when faced with extreme
volatility in relevant markets.
Maintain and monitor objectives on an
ongoing basis.
DEFINED BENEFIT FUNDING AND SOLVENCY
Prudential Standard SPS 160 – Defined benefit funding
and Solvency
Funding to
vested benefit
level
This would include a funding plan
agreed between the RSE licensee and
the employer, and suitable actuarial
investigation and certification to monitor
the funding level.
Requirements will also apply in respect
of restoration to a satisfactory financial
position if funding falls below the vested
benefit level, including requirements
on agreeing restoration plans with the
employer.
Treatment of
sub-funds
APRA will apply funding requirements
equally to both DB funds and DB sub-funds,
with actuaries and auditors having the
same obligations regarding DB sub-funds
as those currently in place for DB funds.
APRA also proposes to extend
requirements for actuarial investigations
to DB sub-funds, including required
content and timing of investigations, with
relevant differences in respect of DB subfunds paying pensions.
Self-insurance
RSE licensees of DB funds will be
required to demonstrate the adequacy
of their self-insurance arrangements in
order to provide an appropriate level of
protection to beneficiaries.
APRA proposes that SPS 160 (in
conjunction with obligations to be
included in Prudential Standard SPS 250
Insurance (SPS 250)) will require actuarial
certification of the adequacy of the selfinsurance arrangements of a DB fund or
DB sub-fund.
Technical
insolvency
and wind-up
priorities
PAGE 5
Take all necessary steps to ensure that
the financial position of a defined benefit
(DB) fund or sub-fund is such that the
liabilities under the trust deed can be
met as they fall due.
RSE licensees of technically insolvent DB
funds or sub-funds must actively monitor
progress towards restoring solvency.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
OPERATIONAL RISK FINANCIAL
REQUIREMENTS
Restoration of
target level
Prudential Standard SPS 114 – Operational risk financial
requirement
Hold financial
resources to
respond to
operational
risk
A specific fund reserve, trustee capital
or a combination of both must be held
to meet operational risk losses facing
the RSE licensee and the funds under its
trusteeship.
Fluctuations below the target level are
expected to be restored to the target level
within a reasonable period.
Reserving
strategy
The current custodian or approved
guarantee arrangements will not satisfy
this requirement.
Resources
held can
only meet
identified
operational
risks
Resources held to meet operational
risk can only be called on to respond to
operational risk losses.
Transition
Where reserves already held by a RSE
licensee do not meet the operational
risk financial requirement, the RSE
licensee must have a plan to build up the
resources to the required level.
These resources can not be used to
address a failure to meet legislative
requirements (including those in section
52 of the SIS Act) or other administration
deficiencies that were not identified by
the RSE licensee as an operational risk.
A reasonable transition period is one that
appropriately considers beneficiary equity
issues. APRA considers a three year
period would be reasonable.
PAGE 6
• Have an investment strategy for the
reserve that provides for adequate
protection of the reserve, given the
assets must be available for use at
short notice;
No minimum target level of operational
risk financial resources will apply at the
outset but APRA expects that an RSE
licensee will typically have a level of at
least 0.25% of funds under management.
Regardless, APRA will have the discretion
to set a minimum target level for specific
RSE licensees (where an RSE licensee
cannot satisfy APRA that they have
appropriately addresses these risks).
Maintain a strategy for managing and
maintaining the operational risk financial
resources that meet the minimum
maters set out in the prudential standard
including, but not limited to:
• Quarantining specific operational risk
reserves from general reserves;
If the amount is held by the RSE licensee
as capital, it must be available for use
only in respect of operational risks
realised within the fund for which the
amount was determined.
Target level
APRA expects the actual amount of
reserves held to fluctuate around the
target level as funds are applied to rectify
losses from operational risk events.
• Policies and procedures for calling
on the resources set aside, including
a clear articulation of when they can
be called upon; and
• Identifying trigger levels that would
result in action being taken to
replenish resources, including an alert
to the board and to APRA.
Managing
operational
risk
APRA considers operational risk as a
core risk and expects an RSE licensee
to include this in its risk management
framework.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
INSURANCE IN SUPERANNUATION
Prudential Standard SPS 250 – Insurance in superannuation
Insurance
strategy
Develop, implement and maintain an
insurance strategy that is appropriate
to the membership of the fund.
Insurance strategy to include, at a
minimum, consideration of the types and
default levels of insurance to be offered,
and the process for selecting
and monitoring an insurer.
Cover all types of insurance offered to
member of both MySuper and choice
products.
Identify particular roles with responsibility
for maintaining the strategy, implementing
and monitoring reporting requirements
for insurance, and performing a periodic
review of the insurance strategy.
Demonstrate that any insurance
products offered are in the best interest
of beneficiaries, having regard to the
characteristics of the membership of the
RSE. This would include an assessment
of the insurer that is to provide the
insurance cover, the insurance policy’s
benefits and conditions, and the cost
effectiveness of the insurance coverage,
among other relevant factors.
Limitations of
self-insurance
Attest annually that the self-insurance
continues to be in the beneficiaries’ best
interests.
Obtain a regular independent
assessment of the adequacy of resources
to meet current and future selfinsurance liabilities.
Develop arrangements for an orderly
transfer of insurance assets and
obligations in the event that the selfinsurance is deemed to be no longer in the
best interests of beneficiaries as a whole.
Where an RSE licensee has determined it
is no longer in the best interests
of beneficiaries to continue to self-insure,
develop a plan for the orderly transition
to new insurance arrangements and for
the equitable distribution or use of any
residual self-insurance assets
PAGE 7
BUSINESS CONTINUITY
Prudential Standard SPS 232 – Business continuity
management
Oversight of
BCM
APRA considers it appropriate to state
explicitly the minimum requirements that
an RSE licensee must meet around BCM.
APRA therefore proposes to include in
SPS 232 Board and senior management
obligations that reflect those in CPS 232.
Business
continuity plan
(BCP)
At a minimum, APRA proposes that RSE
licensees develop and implement a BCP
that:
• is developed on a whole-of-business
basis designed to maintain service
levels;
• includes a Disaster Recovery Plan
that seeks to keep core information
technology and telecommunications
functions operating, or able to be
recovered in a reasonable time frame
if they cease operations;
• identifies critical business functions
and a range of adverse impact
scenarios, and their impact on the
critical business functions; and
• contains appropriate recovery
arrangements that form part of the
RSE licensee’s BCP testing processes.
In addition to having a current BCP in
place for the RSE licensee and the RSEs
themselves, an RSE licensee would also
be required to ensure that all material
outsourced service providers have
a satisfactory current BCP in place.
In particular, RSE licensees will be
responsible for making an assessment
of the adequacy of the material service
providers’ BCP testing processes and the
adequacy of the recovery arrangements
in place.
OCTOBER 2011
PRUDENTIAL STANDARDS FOR SUPERANNUATION
TRANSITION TO MYSUPER
Prudential Standard SPS 410 – Transition to MySuper
MySuper
Transition
KEY CONTACTS
For further information, please contact:
Identify default members and their
existing default balances.
Michael Chaaya
Partner
Tel + 61 2 9210 6627
michael.chaaya@corrs.com.au
Develop and execute a transition plan
that, among other things, determines
when existing default balances will be
transferred to a MySuper product.
Christine Maher
Partner
Tel +61 7 3228 9413
christine.maher@corrs.com.au
Explain how the transfer will be in the
best interests of beneficiaries.
Develop and execute a communication
plan to members and employers about
the MySuper transition plan.
Joanne Dwyer
Special Counsel
Tel + 61 7 3228 9375
joanne.dwyer@corrs.com.au
NEXT STEPS
It is expected that the proposed prudential standards for
superannuation will be finalised during 2012. APRA has
indicated that it will release a consultation paper in early 2012
for consultation with the industry.
Michael Anastas
Senior Associate
Tel + 61 7 3228 9843
michael.anastas@corrs.com.au
You need to consider the scope of the proposed prudential
standards and how they may impact on your business. The
proposed prudential standards are significant in their breadth
and impact.
Hilda Wehbi
Lawyer
Tel + 61 2 9210 6888
hilda.wehbi@corrs.com.au
Corrs has a financial services team with the skills and
expertise to help with submissions and to assist you with the
impact of the proposed prudential standards on your business.
SYDNEY
Governor Phillip Tower
1 Farrer Place
Sydney NSW 2000
MELBOURNE
Bourke Place
600 Bourke Street
Melbourne VIC 3000
BRISBANE
Waterfront Place
1 Eagle Street
Brisbane QLD 4000
PERTH
Woodside Plaza
240 St George’s Terrace
Perth WA 6000
Tel +61 2 9210 6500
Fax +61 2 9210 6611
Tel +61 3 9672 3000
Fax +61 3 9672 3010
Tel +61 7 3228 9333
Fax +61 7 3228 9444
Tel +61 8 9460 1666
Fax +61 8 9460 1667
© Corrs Chambers Westgarth, 2011
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