Licensing Pension Funds and
Trustees
Conference on Supervision of Pension Systems
Warsaw 17 - 19 September 2006
Ross Jones
Deputy Chairman
Australian Prudential Regulation Authority
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Outline
• Elements of the Australian pensions systems
• Role of the Australian Prudential Regulation
Authority
• Licensing regime for pension funds
• Licensing standards
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Element of the Australian Pension System to 1980s
• Safety net age pension introduced 1909 and funded by
government tax revenue on a pay as you go basis. Set at
25% average weekly earnings.
• Mix of public sector and private sector arrangements.
Generally defined benefits schemes supported by employer.
Coverage less than 40% of workforce.
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Australian Pension Systems 2006
• Safety net age pension.
• Compulsory superannuation – employer contribution of 9% of
wages or salary preserved until retirement. Coverage more
than 90% of workforce.
• Voluntary superannuation encouraged by tax concessions
generally preserved until retirement.
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Australian Pension Systems 2006
• Rapid growth over past 10 years to over US$700 billion.
• Most of the funds are defined contributions with members
bearing the investment risk.
• Employees have the right to choose the fund into which
their employer pays the compulsory 9%.
• Employees can move their savings from one fund to another.
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APRA’s Role
• To enforce prudential standards and practices so that under
all reasonable circumstances, financial promises made by
institutions we supervise are met within a stable, efficient
and competitive financial system.
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APRA’s Prudential Approach
• We follow a risk based approach to pension supervision.
• This involves forming a risk assessment of pension funds and
setting and implementing supervision strategies based on
the risk assessment.
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Licensing regime for pension funds
• Trustees must meet a fitness and propriety standard.
• Trustees must have adequate financial, technical and human
resources to conduct operations.
• Trustees must develop and implement a risk management
framework.
• Where trustees outsource material business activities to
service providers, an enforceable agreement meeting
prescribed conditions must be in place.
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Why introduce licences?
• Pension funds are now subject to similar requirements as
deposit taking institutions and insurance providers, the
other prudentially supervised industries.
• Pension funds are now subject to prudential standards which
govern their financial and risk management performance.
• Pension funds are required to have a higher level of
transparency and disclosure to members.
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Immediate impact of licensing
• At commencement of licensing period in July 2004, there
were 1100 trustees eligible to apply.
• Over the two year licensing period, 325 made applications,
15 subsequently withdrew and one was declined.
• Consequently there are now fewer, but larger and more
complex pension funds.
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Licensing Standards 1: Fitness and Propriety
• Applicants must have policies to ensure integrity of persons
running the pension fund with regard to skills, training
needed, minimum standards of probity and dealing with
conflict of interest.
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Licensing Standards 2: Outsourcing Requirements
• Many Australian funds outsource administration, investment
management and custodianship.
• All outsourced arrangements must be established via a
formal written contract setting out price, delivery,
monitoring, rights.
• APRA must be given access to all operations of third parties.
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Licensing Standards 2: Outsourcing Relationships
• Evidence as to why using service providers is in the interest
of members rather than in-house provision.
• Evidence of how the trustee can terminate the
arrangements if service provider performance is inadequate.
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Licensing Standards: Public Offer Fund Requirements
• The Australian pensions industry structure permits public
offer and non-public offer funds.
• Public offer funds are permitted to offer superannuation
products to any person while non-public offer funds are
limited to specific groups.
• Trustees of public offer funds face additional risks and are
required to hold capital to absorb any potential losses.
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Licensing Standards: Risk Management Strategy
• Trustees must show material risks facing its operations, how
these risks have been rated, and risk mitigation strategies.
• Requirement that trustees consider compliance risk,
governance risk, outsourcing risk, and risk of theft and
fraud.
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Where to next?
• Need to monitor the undertakings made by trustees with
regard to policies and procedures put in place.
• Increased interaction with industry advisers such as auditors,
actuaries in areas such as the audit of trustee risk
management statements and plans.
• Further supervisory examination of service providers.
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