Stronger Super Investment Governance

Transcription

1 Stronger Super Investment Governance Concurrent Series 3 Jenny Willcocks, Partner Holding Redlich

2 Overview of today s seminar New obligations and covenants on trustees and directors Changes to statutory defence for investment loss SPS 530 Investment Governance SPS 114 Operational Risk Reserve SPS 231 Outsourcing SPS 520 Fit and Proper

3 New trustee/director obligations MySuper

4 MySuper trustee obligations Promote financial interests of MySuper members Annually assess sufficiency of scale Investment strategy to include investment return target over 10 years; and appropriate level of risk for a MySuper product

5 Obligations directors corporate trustee MySuper product Each director must exercise reasonable degree of care and diligence to ensure trustee meets its MySuper obligations reasonable degree of care and diligence means that which would be exercised by a superannuation entity director in the trustee s circumstances

6 New trustee/director investment covenants All funds

7 Due diligence and diversification All trustees must exercise due diligence in developing, offering and reviewing regularly each investment option ensure investment options offered allow adequate diversification

8 Current Investment Strategies strategy for whole fund addressing risk, diversity, liquidity and ability to meet liabilities New covenant expanded to require regular reviews, and strategy for whole fund and each investment option

9 Investment Strategies (continued) Additional items to be addressed in Strategies whether reliable valuation information available expected tax consequences costs that might be incurred in investing any other relevant matter

10 New director covenants New s.52a covenants by each director corporate trustee include: act honestly degree of care, skill and diligence of a prudent superannuation entity director perform director s duties and powers in best interests of beneficiaries

11 New director covenants (continued) Conflicts of interest No contact/action to hinder director/trustee s proper performance of functions and powers Exercise reasonable degree of care and diligence to ensure corporate trustee meets s.52 covenants

12 Contravening MySuper obligations No monetary penalty or covenants Person suffering loss/damage caused by contravention can recover loss/damage against the person who contravened; and any other person involved in the contravention

13 Investment Defence for investment of Fund action for loss or damage caused by investment of Fund assets Current defence invested according to investment strategy as required by s.52(2)(f) New defence must have applied with all covenants not just investment strategy

14 SPS 530 Investment Governance

15 Investment Governance framework As a minimum must include investment objectives for each option strategy for whole fund and each investment option all Board policies applicable to investments responsibilities and reporting structures for all investment roles structures policies processes for investment performance, risk measurement assessment and reporting review process appropriate to RSE licensees business

16 Monitoring investments must be independent Monitoring investments must be operationally independent from those making investment decisions Review individual responsibilities and re-assign if necessary Creates issues for those with limited internal resources

17 Investment Strategies Document how process has addressed all investment covenants to protect trustee/directors defence Diversification appropriate for each investment strategy Stress testing for each investment strategy Asset allocation targets and ranges Additional requirements for MySuper strategy

18 Investment selection process Process and criteria to give effect to investment strategy Effective due diligence prior to selecting investments Understanding factors that could materially impact on achieving investment objectives Ensuring is appropriate for the investment option

19 SPS 114 Operational Risk Financial Requirement

20 Basis of Operational Risk Reserve (ORR) S. 52(8)(b) Covenant relating to risk maintain/manage as per prudential standards financial resources (whether capital of the trustee, a reserve, or both) to cover operational risk Access to capital outside of fund or establish operational risk reserve

21 Strategy to manage ORR Board of trustee determines target amount to be held (review annually) tolerance limit (if falls below must replenish) APRA can determine different target amount or tolerance limit if thinks is inadequate Can only use for losses due to operational risk Must have a strategy for meeting target amount

22 Statutory defence s.55(6) defence to actions for loss/damage to a person caused by management of reserves if trustee can show has complied with all trustee and director covenants and MySuper obligations Same basis as for investment losses Documentation of management strategy and process essential to preserve this defence

23 Transitional arrangements for ORR 3 years to build ORR on a fair basis with regard to beneficiaries interests Transition plan how to build and when final Public offer funds must maintain current capital arrangements until built

24 SPS Outsourcing

25 Outsourcing policy Outsourcing policy must include detailed management framework specific requirements of outsourcing to associated entities identify risks must be on arm s length basis in best interests of beneficiaries address conflicts, including how associated risks are identified, monitored, managed, mitigated specific requirements for serviced providers outside Australia

26 Outsourcing agreement Specific requirements for agreements expanded legally binding enforceable in Australia subject to Australian law signed by all before outsourcing commences offshoring arrangements (including via sub-contract)

27 Offshoring arrangements Outsourcing agreement must address offshoring arrangements offshoring means outsourcing material business activity to service provider where activity is conducted outside Australia

28 Offshoring arrangements (continued) Consult with APRA before entering into offshoring agreement for a material business activity APRA to satisfy itself impact adequately addressed under RSE risk management strategy If APRA not satisfied may require other arrangements to be made for the activity

29 Notice to APRA Notice to APRA as soon as possible after execution, but not more than 20 business days, including summary of key risks and risk mitigation strategies Notice to APRA as soon as possible after termination details of transition arrangements future strategies for the relevant material business activity

30 Transitional provisions Transitional provisions apply existing contractual agreements new contractual arrangements after December 2012 Steps to be taken renegotiation of existing contractual agreements APRA must be notified if requirements cannot be met

31 SPS 520 Fit and Proper

32 Expands responsible person definition Applies to responsible persons director senior manager of trustee approved auditor actuary secretary Person performing activities of a connected entity (i.e. subsidiaries) that could materially affect all or substantial part of trustee s business operations or financial standing, directly or indirectly

33 Definition senior manager senior manager makes or participates in decision affecting all or substantial part of trustee s business and other specific functions person need not be an employee of trustee can be consultant, contractor or employee of a connected entity or related company Review responsible persons to identify those not previously included, provide details to APRA

34 Action items Review due diligence processes and how they are documented Review decision process to ensure addresses requirement to comply with all covenants and MySuper obligations Develop investment strategies for all investment options Review existing investment strategy to include additional items

35 Action items (continued) Review existing investment governance against new investment governance framework to identify any gaps Review roles of those involved in implementing and monitoring investments and ensure those monitoring remain independent

36 ORR Action items (continued) determine source of funds to establish ORR determine target amount and tolerance limit investment strategy appropriate to nature of ORR procedures for monitoring level and replenishment processes

37 Action items (continued) Review all agreements for outsourcing material activities against new outsourcing prudential standards, amend and renegotiate as required Review outsourcing policy to deal with requirement for offshoring arrangements Identify responsible persons to be subject to Fit and Proper policy and ensure requirements of new prudential standards have been met