Australia: APRA Discussion paper on prudential standards for superannuation released

Superannuation Update
Last Updated: 3 October 2011
Article by Peter Charteris, Philip Broderick, Heather Gray and Tze Ting Liew

Following closely on the Federal Government announcement that MySuper products will be able to be offered from 1 July 2013 and will be required to be offered as the default option from 1 October 2013, the Australian Prudential Regulation Authority (APRA) has released its discussion paper on the Prudential Standards for Superannuation.

The key change from a trustee's point of view is that APRA is to be given the power to make Prudential Standards that have statutory force. It is likely that the powers will be along the lines of those set out in the Life Insurance Act and Insurance Act. In Part IIIA of the Insurance Act, for example, APRA may make Prudential Standards. Part IIIA imposes a statutory obligation on a general insurer to comply with the Prudential Standards and there are reporting obligations for breaches of those standards with the failure to report a breach an offence.

APRA proposes statutory Prudential Standards in 12 areas. All the areas except transition to MySuper are discussed in the paper.


The standard will establish minimum requirements on how Registered Superannuation Entity (RSE) licensees are to govern themselves.

There will be no requirement to have an independent director. If the trustee proposes an independent director, there will be a modification of the current section 10 SIS definition because it precludes a person who is a member of the fund. There will be restrictions on former service providers and former employees being an independent director. Other than former chief executive officers (where APRA suggests three years), there will be no specified waiting period.

Trustees will have to have a board tenure and renewal policy. Whilst APRA will not specify a maximum tenure for directors, the policy must state a maximum term. Where an individual director exceeds the maximum term specified in the policy then there will need to be a policy whereby the board can demonstrate to APRA why this is appropriate.

The minimum features of the policy will be:

  • how the trustee intends to ensure the board remains open to new ideas and independent thinking whilst retaining adequate expertise
  • consideration of the period of service of a director that could be perceived to materially interfere with their ability to act in the best interests of beneficiaries
  • the process for appointing and removing directors.

In addition, trustees will have to conduct:

  • ongoing assessment requirements of the board committees and individual directors
  • regular independent and objective assessment of performance.

There will requirements as to board committees and, in particular, there will be a requirement for an audit committee and a remuneration committee for remuneration of all responsible officers.


At present, APRA has a draft conflicts of interest policy. This will be superseded by the new Prudential Standard.

The standard will in part draw on the current draft policy. In addition to the new duties to give priority to members, use of specified service providers will be covered.

At a bare minimum, the conflicts framework will require the trustee to:

  • ensure that directors understand the circumstances that may give rise to conflict and the purpose of a conflict policy, as well as their obligations as a director in relation to conflicts
  • undertake regular enquiry to identify conflicts arising from service providers
  • undertake regular enquiry to identify any conflicts of duty or conflicts of interest by service providers where these could affect performance of the service provider
  • adopt disclosure of interests procedures
  • maintain a register of gifts, interests and benefits subject to material interests
  • maintain a record of how conflicts are managed (which will need to be included in the minutes).

As well as the conflicts management framework above, there needs to be a conflict management policy. At a minimum, this must outline:

  • processes to ensure there is monitoring and assessment of conflicts, both potential and actual, and appropriate action
  • how the trustee identifies and responds to conflicts
  • adequate disclosure of conflicts to members.


There are currently significant obligations in SIS regulation 4.14 and in APRA's non-binding Prudential Standards. APRA proposes to align its new standard, with appropriate modification, to the binding obligations in its existing standard, CPS520 (which is the binding standard relating to fitness and propriety for authorised deposit-taking institutions).

The statutory trustee duty is to be restated and the new standard will also take this into account.

APRA intends taking a greater role in its administration of the fitness and propriety test, with the trustee being required to ensure that individual directors are fully informed about their obligations prior to appointment and the board demonstrates on an annual basis that it meets the criteria.

Currently, fit and proper applies to a responsible officer, which is a director, secretary and executive officer. This is to be replaced with the concept of responsible person, which will be expanded to include senior managers, auditors and (for defined benefit funds) the actuary.


There is to be a complete revision of the approach to risk management.

APRA takes the view that the current approach is inadequate and focuses on the documents required, and will require instead a 'holistic framework'.

The following minimum elements will need to be covered:

  • risk management strategy
  • risk management policies, controls and procedures to identify, assess, monitor, report on and mitigate all material risks
  • business plan
  • clearly defined responsibilities and lines of reporting for managing risk
  • process for regular review.

APRA will expect that trustees have explicit provisions as to their appetite and tolerance for the various risks to which the fund is exposed.

There are to be specific requirements in relation to the risk appetite, both at the fund level and for individual risks. The risk appetite procedures will need to involve at least the following:

  • articulating the risks that the trustee is comfortable being exposed to and those that it seeks to avoid
  • estimating possible maximum impact on beneficiaries in the event the particular risk is realised
  • demonstrating, where risk mitigation measures are inadequate to reduce residual risk to below tolerances expressed, what the trustee will do to further mitigate or remove itself from the risk.

Alignment between risk management framework and strategic plan and business plan will be expected. The risks associated with the ownership structure of the trustee will need to be covered. There will need to be a dedicated risk management function. The board of the trustee will be required to provide a risk management declaration annually to APRA stating that, among other things, it has in place systems for the purpose of complying with various Acts, Regulations and reporting obligations.


Currently outsourcing is covered by SIS reg 4.16. The current procedures do not require there to be a selection process or the need for a policy governing the use of service providers. These will be required. For those funds that do not already have this, there will need to be work in this area.

APRA expects outsourcing policies in relation to both material and non-material outsourcing arrangements.

There is to be a new requirement that all material outsourcing appointments must be in writing and legally binding. This could present some interesting challenges in the case of new insurers where the life policy often follows well after the appointment. It may be that the tender response and acceptance of that response constitutes the writing.

It also presents issues where parties are unable to agree to all terms and, accordingly, it is inappropriate from a trustee duty point-of-view to commit to the written terms that are less than what the trustee considers appropriate to carry out its duties. There is considerable potential for conflict in this area where the trustee's best interests are inconsistent with this rather bland requirement.

There will need to be adequate due diligence and monitoring procedures.


Investment strategy in the current section 52(2)(f) of the SIS Act is to be completely reworked as part of the MySuper changes. Accordingly, the prudential requirements will need to encompass the new requirements once they are legislated and the trustee's policies must reflect this accordingly.

APRA sets out guidelines (based on what it assumes will become the law) as to how a trustee might approach investment fees, liquidity management, valuations and risk measure using the standard measurements.

There will need to be clear investment objectives and strategies.


There is to be a new operational risk requirement. This can be funded from capital or by creating a reserve out of the trust fund itself, or a combination of both.

APRA does not propose to set a minimum target. However, it has an expectation of at least 0.25% funds under management.

The risk reserves policy will need to identify the uses of the reserve funds. Trustees will need to review their trust deeds to ensure that they have adequate powers to establish such reserves and apply those reserves in accordance with the Prudential Standards.


Funding and solvency for defined benefit funds is to meet new prudential guidelines. These guidelines will be drawn from the SIS regs and existing APRA guidance material, but will also incorporate new requirements including those that require funding at the vested benefit level.


There is to be an audit standard in place of the relevant obligations in the SIS Act.

One of the new requirements will be that there is to be an internal audit function, which is to be appropriate having regard to the nature of fund complexity and the trustee's operations.


The trustees will need a business continuity plan consistent with the new standard. The proposed new standard will be drawn from regulations 4.15 - 4.16 of the SIS Regs, SPG230, SPG200 and SGN130.1.

Again, revision will be required to make sure the elements, as revised, are covered and at a minimum, the BCP must cover the following:

  • whole-of-business basis designed to maintain service levels
  • disaster recovery plan that seeks to keep core information technology and telecommunications function operating or able to be recovered within relatively short times
  • the critical business functions and their impacts
  • appropriate recovery arrangements.


This new standard will require the trustee to have an insurance strategy with a minimum consideration of the types and default levels of insurance to be offered and a process for selecting and monitoring an insurer.


With the implementation of the major review of superannuation now starting, there will be both new standards and revision of existing standards required.

As a starting point, trustees will need to identify what their current policies cover and the gaps that need to be filled. Trustees could consider starting work on this high-level policy as it is unlikely to be dependent on the minutia of the actual standards. An obvious example is the development of the board tenure and renewal policy.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

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