Australian Superannuation System Presented to representatives of Association of Provident Fund from Thailand 21 June 2013 Mark Welling, Superannuation Specialist Australian Prudential Regulation Authority 1
Topics covered today 1. Retirement incomes policy 2. Size and drivers of growth 3. Structure of the superannuation industry 4. Superannuation investments 5. Regulatory framework 6. Prudential supervision 2
1. Retirement incomes policy The demographic challenge in Australia is similar to other countries: Age group 2011 2047 Change 0-14 4.2m 18.8% 5.0m 15.0% - 3.8% + 19% in number 15-64 15.1m 67.2% 19.7m 59.7% - 7.5% + 30% in number 65-84 2.8m 12.2% 6.6m 19.7% + 7.5% + 175% in number 85 & older Total Persons 0.4m 1.8% 1.9m 5.6% + 3.8% + 375% in number 22.5m 100% 33.2m 100% + 47.6% + 48% in number 3
1. Retirement incomes policy (cont d) The three pillars of the Australian retirement incomes policy are: Government funded, means-tested Age Pension acts as safety net a maximum of 27% of Average Earnings for a single person and 42% for a couple Compulsory employer Superannuation Guarantee (SG) contributions now 9.5% of salary; planned increase to 12% by 2019 payable to a fund chosen by the employee (or a default MySuper fund chosen by the employer if the employee does not choose a fund) Voluntary additional superannuation and other savings Super savings are encouraged by tax concessions and government co-contributions 4
1. Retirement incomes policy (cont d) Some special features of the Australian superannuation system: Every super fund must be structured as a trust with a board of trustees who manage the investment and operations of the fund All APRA-regulated funds have corporate trustees Over 90% of members and benefits are in defined contribution (DC) funds defined amount of contributions go into fund end benefit is whatever this grows to member chooses investment option from selection in the fund Defined benefit (DB) funds benefit is calculated based on final-salary and years of membership in fund employer contributes whatever actuary determines is required generally only available in some public sector & large corporate funds generally closed to new members DC funds are either: for profit (retail funds); or not-for profit (industry funds, corporate funds or public sector funds) Anyone can join & contribute to a superannuation fund even if not working 5
1. Retirement incomes policy (cont d) Some special features of Australian superannuation contributions: Member contributions are generally not compulsory but tax incentives and the policies of many funds encourage voluntary contributions Voluntary contributions generally cease by age 65 members can contribute up to age 74 while still working All contributions and growth since 1999 are preserved, i.e. not payable until the member satisfies a Condition of Release, e.g.: retirement after reaching preservation age (now 55 but rising to 60) death, permanent incapacity, terminal medical condition turning age 65 Severe financial hardship (on social security benefits for > 26 weeks) Compassionate grounds (to cover costs of funeral, mortgage payments, severe illness) 6
1. Retirement incomes policy (cont d) Some special features of Australian superannuation benefits No legislated age when benefits must be paid to the member allows members flexibility in managing their retirement some trust deeds require benefits to start by a specific age, eg. DB pension Benefits may be taken as pension and/or lump sum market-linked Account Based Pensions are flexible and popular after age 55, even if working, you may access superannuation as a Transition to Retirement Pension (up to 10% of balance each year) Part or all of a member s benefit can be rolled over between funds at any time known as portability of benefits does not apply to most DB funds 7
1. Retirement incomes policy (cont d) Taxation of superannuation: Contributions by employers and self-employed: deductible & taxed at 15% when received by fund by employees: generally non-deductible and not taxed when received by fund Fund investment income in accumulation phase: taxed at 15% (10% for capital gains over 12 months) in pension phase: taxed at 0% (incentive to take as pension rather than lump sum) Benefits if received after age 60: tax free both pensions and lump sums* if received before age 60: reduced tax* *additional tax payable from some public sector funds which did not pay tax on employer contributions 8
2. Size and drivers of growth 9
2. Size and drivers of growth (cont d) 10
2. Size and drivers of growth (cont d) Main drivers of growth in superannuation assets: Compulsory employer contributions of 9.5% of wages Superannuation Guarantee started at 3% in 1992 and has been 9% since 2002 Increased preservation of benefits since 1999 High real investment returns averaging about 4% pa over last 20 years Significant tax concessions encourage additional contributions & net growth Government Co-contributions since 2003-04 11
3. Structure of superannuation industry Size of each sector Assets ($ billion) Dec 2012 % of total Number of entities Dec 2012 % of total By fund type Corporate 58 3.8% 119 0.02% Industry 295 19.6% 56 0.01% Public sector 237 15.7% 38 0.01% Retail 398 26.4% 131 0.03% Pooled superannuation trusts 93-67 - Self-managed super funds + SAFs 476 31.6% 499,344 99.92% Balance of life office statutory funds 44 2.9% - Total (excl PSTs) 1,508 100% 499,755 100% 12
3. Structure of superannuation industry 35% 30% 25% 20% 15% 10% 5% Relative proportion of each sector by asset size - historical 0% Jun 97 Jun 98 Jun 99 Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Dec 10 Corporate Industry Public sector Retail Small 13
3. Structure of superannuation industry Retail funds and industry funds are the dominant sectors of APRA-regulated funds Corporate funds have lost the greatest market share many have consolidated into retail master trusts or industry funds Public sector funds are also in relative decline most defined benefit funds are closed to new members Self Managed Super Funds ( SMSFs ) have grown strongly over last 10 years Each SMSF has only 1 or 2 members who are the trustees of their own small fund SMSFs are regulated by Australian Taxation Office not APRA 14
4. Investments Legislation does not impose quantitative investment controls on trustees Investments are a trustee decision subject to prudent person test Trustee must exercise same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments Trustee must have an Investment Management Framework and strategy for the fund that takes into account: risk/return having regard to investment objectives and cash flow requirements asset composition of option/fund, diversification liquidity requirements considering fund s need for cashflow valuation information existing and prospective liabilities tax and fees impacts Weblink see SPS 530 Investment Governance: http://www.apra.gov.au/super/prudentialframework/pages/superannuationprudential-standards.aspx 15
4. Investments (cont d) Main prudential investment restrictions: borrowing by fund is generally prohibited lending to members is generally prohibited acquiring assets from member, trustee or related parties is generally prohibited dealing with related parties must be on arms length basis assets valued on market valuation basis maximum of 5% in-house assets Trustee must act in the best interest of members 16
4. Investments (cont d) Trustee must have an investment strategy for each investment option in fund Investment management & administration functions are commonly outsourced asset consultants advise trustees on investment manager selection and asset allocation but trustee still responsible overall and to establish policies, objectives and govern the process some investment and administration functions are being taken back into the fund as funds grow larger 17
4. Investments (cont d) Most funds offer members a choice of investment options Diversified, e.g. conservative, balanced, growth; OR Sector specific options, e.g. cash, fixed interest, property, shares, international Most members, particularly in industry funds, are in the default investment option - asset mix is determined by the trustee Default option is generally well diversified approx: 65% growth assets 25% fixed interest and cash 10% other assets 18
4. Investments (cont d) 19
5. Regulatory framework Australian Parliament Ministry (Treasury) Australian Taxation Office (ATO) APRA Australian Securities and Investments Commission (ASIC) Commissioners APRA Members Commissioners Administration of tax system Regulation & supervision of SMSFs Prudential Regulation of banking, insurance and superannuation organisations Market integrity Consumer protection Corporations 20
5. Regulatory framework (cont d) Australia has the twin peaks model of regulation of financial institutions: APRA is prudential regulator of financial institutions incl. super funds/trustees but not the half million SMSFs ASIC regulates market conduct, consumer protection and disclosure aspects of superannuation Trustees must be licensed by APRA - around 200 licences issued to trustees who control about 300 large funds 21
5. Regulatory framework (cont d) Stronger Super reforms Australian superannuation industry is currently in the process of reforming many important practices in response to changing legislative/regulatory basis Changes are based on recommendations of the Cooper Report - a thorough investigation into governance, efficiency & operations of super industry Most measures start in 2013-14, including: stricter legislative and other standards are imposed on all trustees APRA has power to make Prudential Standards (not just enforce Act & Regs) APRA has a wider range of enforcement options for breaches & failing trustees special standards for MySuper funds that can accept default SG contributions electronic processing contributions & rollovers of benefits between funds funds must publish dashboard information for consumers to compare APRA to collect more detailed statistical data 22
5. Regulatory framework (cont d) The bases for the prudential regulation of the superannuation industry are: 1. Superannuation Industry Supervision (SIS) Act 1993 (Commonwealth) outlines high level obligations, high level definitions and regulator s duties & powers 2. SIS Regulations (1994) contains detailed provisions on some prudential & retirement income policy matters 3. Superannuation Prudential Standards (SPSs) - 2013 describes detailed requirements/principles on particular prudential aspects 4. Superannuation Prudential Practice Guides (SPGs or PPGs) - 2013 material to guide trustees etc. as to how to comply with Act, Regs, Standards 5. Other APRA sources, etc Superannuation Circulars, Letters to trustees, Superannuation Guidance Notes, FAQs, class Modification Declarations. Details of regulatory framework at weblink: http://www.apra.gov.au/super/prudentialframework/pages/superannuationprudential-framework.aspx 23
5. Regulatory framework (cont d) Main SIS Act areas of prudential regulation & APRA s supervisory role: License/disqualify trustees, register funds & authorise MySuper products Supervise fund s compliance with trustee s covenants to: act honestly, fairly and in the best interests of the members exercise a prudent level of care, skill and diligence to formulate, review & give effect to an investment strategy for fund & each investment option having regard to the investments characteristics of: risk, return, diversification, liquidity, cashflow, tax, costs, valuation information to formulate, review & give effect to an insurance strategy for members provide Death, Total & Permanent Disability (TPD) - temporary disability (optional) 24
5. Regulatory framework (cont d) to formulate, review & give effect to a risk management strategy to identify, assess, manage, mitigate and monitor all material risks that may affect trustee s ability to meet obligations to beneficiaries Key risks: Governance, Investment governance, Liquidity, Operational, Insurance, Strategic and tactical risks arising from trustee s business plans. Prudential investment restrictions (see slide 18) Trustee structure: equal employer-member Board representation; independent Supervise duties of trustees, custodians, investment managers, auditors, actuaries Setting and supervising funds audit, accounting and reporting standards & data Setting uniform standards for electronic transfer of rollovers and contributions Collection of funds financial and performance data (FSCoD Act) 25
5. Regulatory framework (cont d) 12 new Superannuation Prudential Standards: SPS 114 Operational Risk Financial Requirement SPS 160 Defined Benefit Matters SPS 220 Risk Management SPS 231 Outsourcing SPS 232 Business Continuity Management SPS 250 Insurance in Superannuation SPS 310 Audit and Related Matters SPS 510 Governance SPS 520 Fit and Proper SPS 521 Conflicts of Interest SPS 530 Investment Governance SPS 410 MySuper Transition http://www.apra.gov.au/super/prudentialframework/pages/superannuation -prudential-standards.aspx 26
6. Prudential Supervision How APRA supervises On-site at least every two years (more frequently if higher risk) Off-site (based on quarterly returns submitted by funds) Supervision process review trustee s policies to see if adequate & suitable for size, complexity, business check trustee s systems, strategies, personnel, practices & decisions for material risks check that these systems, etc. are aligned with trustee s business plans & policies check breach register for compliance with SIS Act, Regs & Prudential Standards where APRA considers trustee is not complying, trustee is asked reason why APRA supervisors assess the trustee s/fund s degree of risk in relation to a set series of Risk Areas The risk assessment results in a numerical risk rating for each separate Risk Area and these are aggregated to determine the Overall Risk rating of the trustee/fund 27
6. Prudential Supervision (cont d) Probability And Impact Rating System (PAIRS) Risk Areas Board Management Risk Governance Strategy & Planning Liquidity Risk Operational Risk Market & Investment Risk Insurance Risk Modules Board Management Risk Governance Strategy & Planning Liquidity Risk Operational Risk Market & Investment Risk Insurance Risk 28
6. Prudential Supervision (cont d) APRA s supervision stance is determined by the trustee s/fund s Overall Risk rating Risk Assessment PAIRS Update Supervision Activities Prudential consultation Prudential reviews Offsite analysis Targeted reviews Ad hoc meetings Supervision Strategy Supervisory Action Plans 29
6. Prudential Supervision (cont d) SOARS (Supervisory Oversight and Response System) Probability Rating Low Lower Medium Upper Medium High Extreme Impact Rating Extreme Normal Oversight Mandated Improvement High Normal Oversight Oversight Restructure Mandated Improvement Restructure Restructure Medium Normal Normal Oversight Mandated Improvement Restructure Low Normal Normal Oversight Mandated Improvement Restructure 30
6. Prudential supervision (cont d) APRA s main focus in supervising DC funds is governance and control of operational risk - with DB funds, the focus is on vested /accrued benefits DC funds transfer the investment risk to members and therefore generally do not have solvency risk in relation to any promised or guaranteed benefit Operational risk arises from the day to day running of the fund and includes outsourced activities new Operational Risk Financial Requirement (ORFR) of 0.25% of FUM Unit pricing / crediting rates is a major operational risk - complex and sometimes high volume - problems exacerbated by acquisitions and legacy systems 31