The Federal Government released its Stronger Super Information Pack (the Pack) on 21 September 2011. The Pack contains key design aspects of the Stronger Super Reforms. This Update provides an overview of the Governance part of the Pack.
It was originally proposed that a new statutory office would be created called Trustee Director, where the duties, power and standards would all be contained within the Superannuation Industry (Supervision) Act 1993 (SIS Act). The Government has determined after consultation not to proceed with this proposal. Instead it will focus on the following:
Conflicts of interest
The Government will introduce a duty for trustees and directors of corporate trustees (trustees) to give priority to the interests of members when their duty as a trustee conflicts with other duties.
It also proposes to strengthen the requirements around managing conflicts of interest for individual trustees. No detail is given.
It is part of a trustee's fiduciary duty to members to put the interests of members first. It is also a covenant under the SIS Act that trustees perform their duties and powers in the best interests of beneficiaries. Trustees are subject to stringent requirements to identify and manage actual and potential conflicts of interest.
Until details are provided via the legislation, it is not possible to assess how these changes will add to what are already clear and long standing legal requirements.
Trustee standard of care
The trustee standard of care under section 52(2)(b) of the SIS Act is to exercise the same degree of care, skill and diligence as an "ordinary prudent person". It is proposed to increase this standard of care, skill and diligence to that of a "prudent person of business" which is consistent with the standard set at common law and is a higher standard.
Duties applicable to individual directors of a corporate trustee to act honestly and to exercise independent judgment will be clarified.
The change to the standard of care may create issues for some trustee boards with equal representation. The "prudent person of business" test sets a higher benchmark for trustees to be measured against. It is more appropriate to a professional trustee and requires a higher level of expertise and knowledge than that required by the "ordinary prudent person".
Impact of trustee decisions
The Government will refer to APRA the proposal that trustees be required to include in their deliberations the impact of any decision on the environment, the community and the Fund's reputation. APRA will consider whether this should be addressed through guidance material.
A requirement for trustees to devise and implement an insurance strategy, and to impose a statutory duty on trustees to manage insurance with the sole aim of benefitting members will be introduced.
Trustees under the existing duty of care imposed by law should already be managing insurance with the sole aim of benefitting members. However, these changes will require trustees to take a more structured approach to insurance and undoubtedly to document it.
Investment strategy covenants
Currently the SIS Act imposes covenants trustees must comply with when developing the Fund's investment strategy. This includes consideration of risk, diversity, liquidity and the trustee's ability to meet liabilities. It is proposed to add to these covenants to require in addition that a trustee must also have regard to the expected costs, taxation consequences and availability of valuation information in the development of an investment strategy.
SIS defence re investments
Currently the defence under section 55(5) of the SIS Act to an action for loss or damage suffered by a member as a consequence of an investment by the trustee is available where the investment is made in accordance with the investment strategy under the covenant, in sub-section 52(2)(f). As indicated above, that covenant will be expanded to impose further factors trustees will need to take account of when determining the Fund's investment strategy. Failure to do so will result in the loss of this defence.
In addition it is also proposed that before the section 55(5) defence can be relied on, the trustee must be able to show that it has complied with all of the covenants in sub-section 52(2) and not just the covenant relating to formulating an investment strategy.
Therefore to qualify for the defence a trustee will also have to show that they acted honestly, applied the same degree of care, skill and diligence of a "prudent person of business" and not an "ordinary prudent person" and exercised their duties and powers in the best interests of beneficiaries, etc.
In other words, it will not simply be enough to prepare an investment strategy that ticks all the boxes under section 52(2)(f) of the SIS Act to be protected under section 55(5). All the other elements of the covenants will also come into play. While all trustees should be employing these other covenants when dealing with investments it is clear that discussions, due diligence and decisions will need to be carefully documented to demonstrate this to ensure that the section 55(5) defence is available.
The Government will request APRA and ASIC to address the issue of Funds publishing proxy voting policies and procedure, and disclosing voting behaviour to members on their websites. The motivation for this is to ensure voting rights attached to assets of the Fund are being managed in the interests of members. How this will be monitored or enforced remains to be revealed.
Other investment proposals
Other proposals relating to investments are as follows:
- ensuring that trustees offering choice products offer a range of investment options sufficient to allow members to obtain a diversified asset mix;
- require trustees to exercise due diligence in selection and monitoring of investment options to ensure members obtain a diversified asset mix;
- require trustees to exercise due diligence in selection and monitoring investment options and that they operate in accordance with all other covenants under sub-section 52(2) of the SIS Act before any defence can be claimed under sub-section 55(5).
Operational Risk Reserves
The Government will introduce a risk-based financial requirement to manage operational risk which will replace the existing trustee capital requirements after a transitional period. APRA will develop a prudential standard of the approach for determining the financial requirement for individual funds. That standard will also describe the roles that the operational risk reserve and trustee capital will play in meeting the new financial requirements. This will be subject to detailed consultation between APRA and the superannuation industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.