Options for Improving the Safety
of Superannuation
Issues Paper
Agenda
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Introduction
Licensing regime
Legislative structure
Member participation
Financial assistance
Other issues
Closing
Licensing
• 3 options
– APRA licence
– ASIC licence
– Both
• Twin peaks model
– APRA dealing with prudential issues
– ASIC responsible for consumer protection and
market integrity
Current arrangements
• Funds offering to the public required to
have APRA approved trustee
• Funds offering to the public required to
have an ASIC dealers licence
– under FSR funds will also be required to be
licensed to provide advice
• 50% of Approved trustees have both
licences
ASIC licence
• Similar to the licence for managed
investment schemes
– to operate the fund
– to deal in and advise on interests in the fund
• Licence criteria addressed at competence
and consumer protection matters
• Individual trustees licensed as a group
– outsource some licence obligations
APRA licence
• Extend licensing to all funds other than:
– exempt public sector superannuation schemes
– self managed superannuation funds
• Similar to approved trustee requirements
• Benefits of licensing
– notice of funds
– imposition of conditions
– licensing sanctions
Dual licensing
• Both APRA and ASIC licence
• Under FSR many APRA regulated bodies
will have dual licences
• Different regulatory purposes
• Overlaps dealt with
– legislatively
– administratively
Compliance plans
• Adjunct to licensing or separate requirement
• Required under Corporations Act for
managed investments and AFSLs
• How the entity will ensure compliance with
legislative requirements
• Subject to annual audit
• Transitional arrangements
Issues for discussion
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Is licensing necessary?
Which kind of licence?
What to licence - the fund or the trustees?
Different licences for different funds or
one?
• Are additional measures for reducing
overlaps necessary?
Issues cont’d
• Mechanisms for addressing industry
restructuring
– possible changes to the self managed fund
threshold
– portablility
• Appropriate transition
• How to fund?
Legislative Structure
• Prudential standards making power
– content of standards
• Three-tiered structure
– Act, prudential standards, guidance notes
• Separate retirement incomes and prudential
provisions
– longer term
Prudential standards power
• Aims
– simplify legislation
– enhance flexibility
– harmonise with other prudential regimes
• Options
– insert standards making power immediately and
move to three-tiered structure in medium term
– Use existing powers in SIS to create standards
Issues for discussion
• Are there already sufficient powers in SIS to
achieve desired goals?
• Is harmonisation with other prudential
regulatory regimes necessary and/or appropriate
for superannuation?
• Can simplicity be achieved with enforceable
standards?
• Impact on existing legislation and regulations
Proposed standards
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Investment rules
Capital adequacy
Outsourcing
Governance and operational risk
Investment rules
• Aims
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consistent with members expectations
diversification
oversight of delegated activities
regular assessment
• Options
– revise existing operating standards
– prudential standard based on APRA’s circular
– compliance plan
Issues for discussion
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Level of detail of guidance
Members questioning trustees decisions
Should APRA be dictating portfolio choices
Trustee as single responsible entity
Impact on retirement incomes
Capital adequacy
• Aims
– financial substance
– incentive to manage fund well
– buffer against operational or governance risk
• Proposal
– reform existing requirements for approved
trustees
– apply these to other superannuation funds
Reforming existing requirements
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Need to be able to access capital in all cases
Avoid inappropriate double dipping
Clarify definitional inconsistencies
Review guarantee provisions
Examine all options including insurance
Review level and composition of capital
requirements
Bringing other funds in
• At least the same requirements as for
managed investments
• No in principle difference with other
approved trustee funds
– except quantum
• Transitional period of two years
Issues for discussion
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How would capital be funded?
Accumulation v defined benefit funds?
How would capital be held?
How to implement?
Compliance costs?
For each fund?
Risk mitigation factors?
Impact of risk profile and outsourcing?
Outsourcing
• Aim
– to ensure risks clearly identified and managed
– appropriate standards and scrutiny
• Proposal
– requirements similar to those applying to ADIs
– minimum requirements that contract should
address
– could be done through standard or regulation
Issues for discussion
• Extent to which standards should be binding
on third parties
• Implementation - standard or regulation
• Overlap with existing limited regulation of
custodians and investment managers
• Compliance costs
Governance and operational risk
• Aim
– systematic identification, assessment and
management of risk
– more effective risk based supervision
– better targeting of requirements
• Proposal
– single standard to deal with operational risk and
governance issues
– broader focus
Options
• Prudential standards power
– remove existing provisions from SIS
• Bring all requirements together as operating
standards under SIS
• Similar to Prudential Standard GPS 220
Risk Management for General Insurers
Issues for discussion
• Interrelationship with capital requirements
and insurance
• Compliance costs
• Compliance audit
Member participation
• Annual general meetings
– right to request a meeting
– master funds
– costs
• Public disclosure of annual returns
– which regulator
– what information
– which funds to exclude
Member participation cont’d
• Related party transactions
– different focus to in house asset provisions of
SIS
– would voting requirements work for
superannuation
– compliance costs
Financial assistance
• Extend to losses from misleading and deceptive
conduct
• Issues
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omissions
overlap with existing requirements
application to predictions
evidentiary requirements
how to know the mind of the member
Issues cont’d
– moral hazard issues
– funding compensation arrangements
Other issues
• Productivity Commission expected to report
next week
• Will consider prudential and governance
issues from Productivity Commission
Report and Watson Committee Reports
Where to from here
• SWG to put out more detailed paper next
week canvassing the issues
• Focus group discussions towards end
January
• Submissions close 1 February
• Report to Government by end March
• Any legislation early in second half of 2002