in brief corrs PRUDENTIAL STANDARDS FOR SUPERANNUATION OCTOBER 2011 NEW APPROACH

Transcription

1 corrs in brief OCTOBER 2011 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 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. 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. Submissions on the proposed prudential standards must be made by 23 December APRA expects to release draft prudential and reporting standards, reporting forms and instructions in early The prudential standards are expected to be finalised during 2012 for commencement in NEW APPROACH 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 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. APRA prudential practice guides and other APRA guidance material do not have legislative force. Under the new framework a three-tiered approach similar to other APRA regulated industries will apply: primary legislation SIS Act (high level obligations, definitions and enforcement powers); subordinate regulation regulations and prudential standards (detailed requirements); and guidance material prudential practice guide (supporting primary and subordinate material). MAKING BUSINESS SENSE

2 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. 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. APRA s current thinking in this regard is set out in the table below: Prudential standards extended to the superannuation industry from current banking and insurance prudential standards GOVERNANCE Prudential Standard SPS 510 Governance Independence of directors Independence of the chair Tenure There will be no prudential standard requiring a minimum number of directors. APRA will however introduce by way of guidance a broader definition of Independent director to apply in the context of equal representation. No prudential standard the chair be independent. APRA will suggest by way of guidance that consideration be given to an independent chair. No prudential standard as to a maximum tenure for directors. RSE licensees must however have a board renewal policy that: defines an appropriate maximum tenure term; states how the board will remain open to new ideas and independent thinking while retaining adequate expertise; Governance Fit and proper Outsourcing Business continuity Risk Audit related matters Prudential standards specifically for superannuation Investment governance Conflicts of interest Defined benefit funding and solvency Insurance in superannuation Transition to MySuper Board assessment 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 specifies the process for appointing and removing directors. 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. Maintain formal procedures for completing a regular (at least annual) independent and objective assessment of performance of both board and individual directors. PAGE 2

3 Board audit committee Have a board audit committee, comprising only non-executive directors of the RSE licensee. Fit and proper Document a fit and proper policy and processes for assessing and taking action on fitness and propriety. Specify action to be taken where a person is assessed as not fit and proper after their appointment. Undertake annual assessment of all responsible persons. 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. Consider the criteria APRA includes in SPS 520. Chair to be a person other than board chair, unless the chair is the sole independent director. 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. 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. Members must be non-executive directors of the RSE licensee. Chair must be a person other than the chair of the board unless the chair is the sole independent director. Have a remuneration policy that covers the requirements in CPS 510 and the same parties, as well as non-executive directors. Publish the remuneration policy in the public section of the fund s website. Prudential Standard SPS 310 Audit requirements Internal audit CONFLICTS OF INTEREST Have an internal audit function that is appropriate to the nature, scale and complexity of the RSE licensee s operations. 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. Publication remuneration of responsible officers 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. Prudential Standard SPS 520 Fitness and propriety Responsible person 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. Prudential Standard SPS 521 Conflicts of interest Framework Conflicts policy Register of duties and interests Develop and maintain a conflicts framework that includes a comprehensive system of internal controls and reporting. Establish a conflicts policy that includes adequate measures to address a RSE licensee s key obligation of identifying and managing conflicts. 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 and disclose to APRA on request. PAGE 3

4 Tied service provider arrangements RISK MANAGEMENT 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. Prudential Standard SPS 220 Risk Management Risk framework Articulate risk appetite Risk within business strategy & plan Risk of ownership structure Risk function Develop a risk 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 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 A process for regular review to ensure risk framework remains effective. Articulate risk appetite as part of an RSE licensee s risk framework, at both the fund operation level and for individual risk. Include, as part of the business planning cycle, the identification and consideration of risks. Specifically consider, identify and address any risks arising from ownership structure or from inherent conflicts. Maintain a specific function with direct responsibility for the and oversight of risk within the RSE licensee. (The function can be outsourced provided it provides the necessary oversight of the risks). OUTSOURCING Prudential Standard SPS 231 Outsourcing Harmonisation with CPS 231 Application to investment and insurance Outsourcing policy Written and legally binding Due diligence Monitoring Contingency The starting point of the new standard will be Prudential Standard CPS 231 which applies to authorised deposittaking institutions and general insurers. 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. Prior consultation with APRA is necessary before entering into any offshoring agreement involving a material business activity. Arrangements with investment managers and insurers will be subject to the same obligations as the outsourcing of a material business activity. 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 framework. All material outsourcing agreements must be made in a written, legally binding agreement. Undertake a due diligence review of the chosen service provider after a tender or other selection process. Establish procedures for monitoring performance under the outsourcing agreement on a continuing basis, including regular contact, service level criteria. Develop contingency plans that would enable the outsourced business activity to be provided by an alternate service provider or brought in-house if required. Attestations Board to provide annual risk declarations to APRA. PAGE 4

5 INVESTMENT GOVERNANCE Prudential Standard SPS 530 Investment governance Align option with investment philosophy Articulate investment objectives Monitor objectives Articulate selection processes and criteria Understand risk Processes Cost impacts Liquidity Trading and valuations Set clear investment objectives that align each investment option with the investment philosophy of the RSE licensee. Maintain and monitor objectives on an ongoing basis. Articulate an expected return objective, risk objective and a relevant benchmark for each option. Maintain and monitor objectives on an ongoing basis. Articulate the processes and criteria used to select investments and implement options. Have the ability to understand and explain to beneficiaries the fundamental risks posed by any investment option. Document processes and criteria for ongoing monitoring of each investment in each investment strategy. Consider how investment costs will impact on fund returns to beneficiaries over time. Consider the liquidity risks of assets and the alignment of these risks to cash flow needs of an investment option. 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. DEFINED BENEFIT FUNDING AND SOLVENCY Prudential Standard SPS 160 Defined benefit funding and Solvency Funding to vested benefit level Treatment of sub-funds Self-insurance 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. 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. 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. 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 RSE licensees of technically insolvent DB funds or sub-funds must actively monitor progress towards restoring solvency. PAGE 5

6 OPERATIONAL RISK FINANCIAL REQUIREMENTS Prudential Standard SPS 114 Operational risk financial requirement Hold financial resources to respond to operational risk Target level Resources held can only meet identified operational risks 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. The current custodian or approved guarantee arrangements will not satisfy this requirement. 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. 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. 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). Resources held to meet operational risk can only be called on to respond to operational risk losses. 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. Restoration of target level Reserving strategy Managing operational risk 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. Fluctuations below the target level are expected to be restored to the target level within a reasonable period. 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; 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; 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. APRA considers operational risk as a core risk and expects an RSE licensee to include this in its risk framework. 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. A reasonable transition period is one that appropriately considers beneficiary equity issues. APRA considers a three year period would be reasonable. PAGE 6

7 INSURANCE IN SUPERANNUATION Prudential Standard SPS 250 Insurance in superannuation Insurance strategy Limitations of self-insurance 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. 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 BUSINESS CONTINUITY Prudential Standard SPS 232 Business continuity Oversight of BCM Business continuity plan (BCP) 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 obligations that reflect those in CPS 232. 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. PAGE 7

8 TRANSITION TO MYSUPER Prudential Standard SPS 410 Transition to MySuper MySuper Transition NEXT STEPS Identify default members and their existing default balances. Develop and execute a transition plan that, among other things, determines when existing default balances will be transferred to a MySuper product. 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. It is expected that the proposed prudential standards for superannuation will be finalised during APRA has indicated that it will release a consultation paper in early 2012 for consultation with the industry. 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. 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. KEY CONTACTS For further information, please contact: Michael Chaaya Partner Tel michael.chaaya@corrs.com.au Christine Maher Partner Tel christine.maher@corrs.com.au Joanne Dwyer Special Counsel Tel joanne.dwyer@corrs.com.au Michael Anastas Senior Associate Tel michael.anastas@corrs.com.au Hilda Wehbi Lawyer Tel hilda.wehbi@corrs.com.au SYDNEY Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Tel Fax MELBOURNE Bourke Place 600 Bourke Street Melbourne VIC 3000 Tel Fax BRISBANE Waterfront Place 1 Eagle Street Brisbane QLD 4000 Tel Fax PERTH Woodside Plaza 240 St George s Terrace Perth WA 6000 Tel Fax Corrs Chambers Westgarth, 2011 This publication does not constitute legal advice and should not be relied on as such. You should seek individualised advice about your specific circumstances. We have sent this publication to you because you have requested to receive these publications from us. If you do not wish to receive such publications, please send an with Unsubscribe in the subject heading and containing your name and contact details to privacy@corrs.com.au. PAGE 8