Options for Improving the Safety of Superannuation

1
Options for Improving the Safety of Superannuation

• Issues Paper

2
Agenda

• Introduction
• Licensing regime
• Legislative structure
• Member participation
• Financial assistance
• Other issues
• Closing

3
Licensing

• 3 options
• APRA licence
• ASIC licence
• Both
• Twin peaks model
• APRA dealing with prudential issues
• ASIC responsible for consumer protection and
  market integrity

4
Current arrangements

• Funds offering to the public required to have
  APRA approved trustee
• Funds offering to the public required to have an
  ASIC dealers licence
• under FSR funds will also be required to be
  licensed to provide advice
• 50 of Approved trustees have both licences

5
ASIC licence

• Similar to the licence for managed investment
  schemes
• to operate the fund
• to deal in and advise on interests in the fund
• Licence criteria addressed at competence and
  consumer protection matters
• Individual trustees licensed as a group
• outsource some licence obligations

6
APRA licence

• Extend licensing to all funds other than
• exempt public sector superannuation schemes
• self managed superannuation funds
• Similar to approved trustee requirements
• Benefits of licensing
• notice of funds
• imposition of conditions
• licensing sanctions

7
Dual licensing

• Both APRA and ASIC licence
• Under FSR many APRA regulated bodies will have
  dual licences
• Different regulatory purposes
• Overlaps dealt with
• legislatively
• administratively

8
Compliance plans

• Adjunct to licensing or separate requirement
• Required under Corporations Act for managed
  investments and AFSLs
• How the entity will ensure compliance with
  legislative requirements
• Subject to annual audit
• Transitional arrangements

9
Issues for discussion

• Is licensing necessary?
• Which kind of licence?
• What to licence - the fund or the trustees?
• Different licences for different funds or one?
• Are additional measures for reducing overlaps
  necessary?

10
Issues contd

• Mechanisms for addressing industry restructuring
• possible changes to the self managed fund
  threshold
• portablility
• Appropriate transition
• How to fund?

11
Legislative Structure

• Prudential standards making power
• content of standards
• Three-tiered structure
• Act, prudential standards, guidance notes
• Separate retirement incomes and prudential
  provisions
• longer term

12
Prudential standards power

• Aims
• simplify legislation
• enhance flexibility
• harmonise with other prudential regimes
• Options
• insert standards making power immediately and
  move to three-tiered structure in medium term
• Use existing powers in SIS to create standards

13
Issues for discussion

• Are there already sufficient powers in SIS to
  achieve desired goals?
• Is harmonisation with other prudential regulatory
  regimes necessary and/or appropriate for
  superannuation?
• Can simplicity be achieved with enforceable
  standards?
• Impact on existing legislation and regulations

14
Proposed standards

• Investment rules
• Capital adequacy
• Outsourcing
• Governance and operational risk

15
Investment rules

• Aims
• consistent with members expectations
• diversification
• oversight of delegated activities
• regular assessment
• Options
• revise existing operating standards
• prudential standard based on APRAs circular
• compliance plan

16
Issues for discussion

• Level of detail of guidance
• Members questioning trustees decisions
• Should APRA be dictating portfolio choices
• Trustee as single responsible entity
• Impact on retirement incomes

17
Capital adequacy

• Aims
• financial substance
• incentive to manage fund well
• buffer against operational or governance risk
• Proposal
• reform existing requirements for approved
  trustees
• apply these to other superannuation funds

18
Reforming existing requirements

• Need to be able to access capital in all cases
• Avoid inappropriate double dipping
• Clarify definitional inconsistencies
• Review guarantee provisions
• Examine all options including insurance
• Review level and composition of capital
  requirements

19
Bringing other funds in

• At least the same requirements as for managed
  investments
• No in principle difference with other approved
  trustee funds
• except quantum
• Transitional period of two years

20
Issues for discussion

• How would capital be funded?
• Accumulation v defined benefit funds?
• How would capital be held?
• How to implement?
• Compliance costs?
• For each fund?
• Risk mitigation factors?
• Impact of risk profile and outsourcing?

21
Outsourcing

• Aim
• to ensure risks clearly identified and managed
• appropriate standards and scrutiny
• Proposal
• requirements similar to those applying to ADIs
• minimum requirements that contract should address
• could be done through standard or regulation

22
Issues for discussion

• Extent to which standards should be binding on
  third parties
• Implementation - standard or regulation
• Overlap with existing limited regulation of
  custodians and investment managers
• Compliance costs

23
Governance and operational risk

• Aim
• systematic identification, assessment and
  management of risk
• more effective risk based supervision
• better targeting of requirements
• Proposal
• single standard to deal with operational risk and
  governance issues
• broader focus

24
Options

• Prudential standards power
• remove existing provisions from SIS
• Bring all requirements together as operating
  standards under SIS
• Similar to Prudential Standard GPS 220 Risk
  Management for General Insurers

25
Issues for discussion

• Interrelationship with capital requirements and
  insurance
• Compliance costs
• Compliance audit

26
Member participation

• Annual general meetings
• right to request a meeting
• master funds
• costs
• Public disclosure of annual returns
• which regulator
• what information
• which funds to exclude

27
Member participation contd

• Related party transactions
• different focus to in house asset provisions of
  SIS
• would voting requirements work for superannuation
• compliance costs

28
Financial assistance

• Extend to losses from misleading and deceptive
  conduct
• Issues
• omissions
• overlap with existing requirements
• application to predictions
• evidentiary requirements
• how to know the mind of the member

29
Issues contd

• moral hazard issues
• funding compensation arrangements

30
Other issues

• Productivity Commission expected to report next
  week
• Will consider prudential and governance issues
  from Productivity Commission Report and Watson
  Committee Reports

31
Where to from here

• SWG to put out more detailed paper next week
  canvassing the issues
• Focus group discussions towards end January
• Submissions close 1 February
• Report to Government by end March
• Any legislation early in second half of 2002