As superannuation fund trustees are well aware, the Australian Prudential Regulation Authority (APRA) has issued 12 draft prudential standards (SPS), which detail how APRA expects superannuation fund trustees to conduct and regulate themselves and their funds.
The SPSs cover a broad range of matters. Some of these matters are common to the insurance and banking sectors and others are specific to the superannuation industry. Currently, the SPSs are in draft form, but once registered, they will have the force of law.
Most SPS requirements are scheduled to apply from 1 July 2013, but some will become operative from as early as 1 January 2013 or on registration of the relevant SPS. Accordingly, to the extent that they have not already done so, superannuation fund trustees must start preparing to meet the SPS requirements, notwithstanding that work done at this stage will need to be reviewed and updated as necessary once the SPSs are finalised.
In this Update, we highlight some (but by no means all) of the practical matters that trustees will need to address in readiness for the commencement of the SPSs.
DRAFT PRUDENTIAL STANDARD SPS 231 - OUTSOURCING
- Have "material business activities" been identified? (A "material business activity" is one that has the potential, if disrupted, to have a significant impact on a trustee's activities and includes internal audit function. The SPS definition is broader than the definition in regulation 4.16 of the Superannuation Industry (Supervision) Regulations 1994.)
- Are all arrangements that outsource a material business activity (Outsourcing Arrangements) contained in a written legally binding agreement that is enforceable in Australia and subject to Australian law?
- Has a checklist been developed to ensure that current and new Outsourcing Arrangements comply with the new APRA standards?
- Will Outsourcing Arrangements be entered into with a service provider that conducts its activities outside Australia? If yes, prior APRA consultation will be required.
- Has an outsourcing policy been developed? Does the policy cover all required matters including:
- A detailed framework for managing Outsourcing Arrangements
- How risks associated with outsourcing are identified, managed and mitigated
- Specific requirements for outsourcing to associated entities?
- Is there written evidence of the tender or selection process for outsourcing a material business activity, and of due diligence undertaken?
- Outsourcing Arrangements entered into on or after the date of registration of the SPS - These Outsourcing Arrangements must comply with the outsourcing agreement requirements currently contained in paragraphs 19 to 24 (inclusive) of the SPS (Outsourcing Agreement Requirements).
- Outsourcing Arrangements entered before the date of registration of the SPS - From the date of registration of the SPS, these Outsourcing Arrangements must, among other things, be assessed for compliance with the Outsourcing Agreement Requirements. Where an Outsourcing Arrangement does not comply:
- The trustee must take all reasonable steps to re-negotiate the terms of the Outsourcing Arrangement in order to minimise, as far as reasonably practicable, any inconsistency between the terms of the Arrangement and the SPS; or
- Where re-negotiation of the terms of an Outsourcing Arrangement would be contrary to the best interests of beneficiaries, the trustee must demonstrate to APRA why it considers the Arrangement should continue.
- All other requirements commence on 1 July 2013.
DRAFT PRUDENTIAL STANDARD SPS 510 - GOVERNANCE
- Has a policy on Board renewals and procedures for assessing Board performance been developed and implemented?
- Does the Board have a skills matrix to ensure that directors and senior management have the full range of skills needed for the effective and prudent operation of the trustee?
- Does the Board have a remuneration policy that aligns remuneration and risk management?
- Does the Board have a process for delegating authorities?
- Where the trustee is a member of a corporate group, has the Board assessed and developed (if appropriate) group policies?
- Does the Board have a remuneration committee charter and terms of reference?
- Does the Board have an audit committee charter?
- Is there an internal audit function?
- Is there a process for ensuring employees are aware of policies and procedures for dealing with employee concerns?
- Have confidentiality or other clauses that inhibit the provision of information to APRA (eg by officers, employees, contractors or professional service providers) been removed from trustee agreements?
DRAFT PRUDENTIAL STANDARD SPS 410 - MYSUPER TRANSITION
- Have members with an "accrued default amount" been identified (Affected Members)? Has the amount of these balances been identified? ("Accrued default amount" will be defined in section 20B of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It will include a member's interest in a superannuation fund:
- In respect of which the member has not given a direction regarding the investment strategy to be applied; or
- Which has been invested in the fund's "default" investment option).
- Has a transition plan to move accrued default amounts to one or more suitable MySuper products by 1 July 2017 been prepared and implemented?
- Are processes in place to notify Affected Members and APRA as required?
- This SPS is expected to apply from 1 January 2013.
- This SPS will not apply to trustees of pooled superannuation trusts, eligible rollover funds or approved deposit funds.
OTHER SPS REQUIREMENTS
- Has a written business plan that details the trustee's approach to managing its business operations been prepared?
- Has a risk management framework that is appropriate to the size, operations and complexity of the trustee's business operations been prepared?
- Have potential business continuity risks been identified and assessed? Have controls been implemented to manage such risks?
- Has a business continuity plan, which documents how the trustee will manage business disruptions, been developed?
- Has a "fit and proper" policy been prepared and implemented?
- Does this policy contain the prescribed minimum requirements?
- Does this policy detail the processes to be undertaken to assess whether "responsible persons" are "fit and proper" in accordance with the requirements of SPS 520? (The concept of "responsible person" is broader than the SIS Act definitions of "responsible officer" and "executive officer". A responsible person need not be an employee of the trustee and includes approved auditors and actuaries.)
- Has a process for dealing with any responsible person who is not "fit and proper" been developed and implemented?
- Has a conflicts management policy, which enables the trustee to identify and avoid or prudentially manage potential and actual conflicts that arise in the trustee's business operations, been prepared and implemented?
- Are there sufficient financial resources to address potential operational risk losses in the trustee's business operations? This amount is known as the "operational risk financial requirement" (ORFR).
- Has a strategy for the implementation, management and maintenance of the ORFR been developed and implemented?
- Has an insurance management framework, which reflects the risks associated with offering insured benefits, been developed and implemented?
APRA has stated that the SPSs are intended to be finalised "before the end of December 2012". The challenge for trustees will therefore be to have relevant documents ready to lodge their MySuper authorisation applications with APRA on or as close as possible to 1 January 2013, so that they are able to offer a MySuper product from 1 July 2013.
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