SUPERANNUATION UPDATE (AUSTRALIA)
The Australian Prudential Regulation Authority (APRA) released its final form superannuation prudential standards on 15 November 2012, softening some aspects while keeping most elements of the draft standards largely unchanged. It is intended that most of these standards will become legally binding on 1 July 2013. Draft prudential practice guides are to be released for consultation in December, with further draft guides to come in the first quarter of 2013.
Significant changes to the draft prudential
Conflicts of interest (SPS 521)
Registrable Superannuation Entity Licensees (RSEs) will not be required under the prudential standards to publicly disclose their conflicts management policy or their registers of duties and interests, as initially proposed. Rather, RSEs will have to continue to comply with existing disclosure requirements under the Corporations Act 2001 (Cth) and with regulations that will be made in due course to support section 29QB of the Superannuation Industry (Supervision) Act 1993 (Cth). APRA has made clear in the 'Response to Submissions' paper (Paper) that accompanied the release of the finalised prudential standards that it continues to believe that disclosure of conflict registers, in particular, will enhance transparency and accountability of RSE licensees.
The dollar value materiality threshold for relevant interests that was proposed to apply has been replaced with an obligation for each RSE licensee to determine whether a duty or interest is 'relevant' for the purposes of the standard. The test is to be whether a duty or interest might reasonably be considered to have the potential to have a significant impact on the RSEs' capacity, or that of its associate or responsible person, to act in a manner consistent with the best interests of the beneficiaries. The conflicts management frameworks will need to include a process outlining how the RSE licensee will determine whether a duty or interest is 'relevant' for these purposes. Although SPS 521 does not express the 'relevance' test in terms of materiality, the Paper refers to this test as being a materiality threshold, and states that APRA intends to issue guidance on factors to consider when determining this threshold, including the application of a dollar value or other limits.
In addition, an RSE is expressly required under SPS 521 to include all of its employees within the scope of its conflicts management framework. However, the requirements in relation to the conflicts register apply only to the RSE, its associates and responsible persons.
Outsourcing (SPS 231)
In a welcome change, outsourcing agreements are not to be required to be subject to Australian law. The former proposed requirement, under the draft standard, could have meant that RSEs would not have been able to invest in some offshore based investments, where the investment managers refused to submit to Australian law. The need to consult with APRA before entering into any offshoring agreement involving a material business activity has been retained in the finalised standard, but APRA is to issue draft guidance on the practical application of the requirements in the first round of prudential practice guides released for consultation.
Insurance (SPS 250)
APRA has stepped back from its proposed requirement that all insurance must be provided through life insurers, and will also allow insurance to be taken through general insurers.
Operational risk financial requirement (SPS 114)
Under SPS 114, RSEs will be allowed, in appropriate circumstances, to reduce the financial resources held to meet the operational risk financial requirement (ORFR) to ensure that the ORFR remains at the target level. This could occur, for example, where the size of the fund's assets decreases. Although APRA identifies this in the Paper as a minor change, and the wording is not as clear as would have been ideal, it does resolve a significant concern about the apparent inflexibility in the proposed requirements.
Investment governance (SPS 530)
An RSEs' investment governance framework must reflect the identified risks (rather than all risks) that are associated with investments as required by SPS 220 (the Risk Management Prudential Standard). This removes the uncertainty inherent in the draft standard, which appeared to require all sources of investment risk to be monitored and managed, whether identified or not.
APRA has addressed to some extent concerns about the proposal in draft SPS 530 to require absolute segregation and operational independence of investment monitoring, investment implementation and investment decision making. These requirements have been clarified, so that persons applying and assessing investment performance measures approved by the board are operationally independent from persons responsible for making investments.
The proposal that RSE licensees should be bound to establish a rebalancing policy has been removed, and replaced with a requirement that they determine the basis on which changes would need to be made to asset allocation targets and ranges.
Governance (SPS 510)
The proposed requirement that all directors be Australian residents has been replaced with a requirement that the majority of directors be Australian residents.
Additional transition periods
APRA has acknowledged feedback that some of the timeframes proposed in the draft standards could create issues for some RSEs. It has, therefore, announced additional transitional periods, including:
- Existing outsourcing contracts which expire prior to 31 December 2013 will not have to be renegotiated (SPS 231), although they will have to be reviewed against the standards
- Existing employment or service contracts will not be required to be renegotiated, but rather the RSEs must take all reasonable steps to renegotiate them and to notify APRA of their existence (SPS 510)
- The proposed timeframe in which actuarial reporting in relation to defined benefit funds is to be required has been increased to nine months until 30 June 2016, when it will change to a six-month period (SPS 160)
- Existing plans to return defined benefit plans to a satisfactory position can be retained, even if they are longer than the proposed three-year limit, provided they have been approved by APRA (SPS 160)
- The requirement to provide five years' worth of insurance claims data immediately will be subject to a three-year transition period (SPS 250).
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