Superannuation prudential standards and guidance - frequently asked questions

The FAQs on this page refer to provisions of APRA’s prudential standards for superannuation and proposed legislative amendments which have not yet become law. Accordingly, the views and draft provisions set out in these FAQs are subject to change. The FAQs may also include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.

The numbering of these questions is fixed and will not change as new questions are added.

APRA has archived a number of FAQs which contain matters that are covered in the final prudential standards or in the final prudential practice guides.

For more information see legislated outcomes assessment and Prudential Standard SPS 515 Strategic Planning and Member Outcomes - frequently asked questions.

Governance

1. The version of the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (the Bill) introduced into Parliament on 16 September 2015 is different to the exposure draft released by the Government on 26 June. Does APRA intend to make any further changes to the consultation package released on 31 August 2015?

The version of the Bill introduced into Parliament includes amendments to the meaning of independent in s. 87 such that a person will not be considered to be independent if they have (or have had) a business relationship with the RSE licensee that is, or was at the time, material to either the person or the RSE licensee.

APRA proposes to make a further change to Prudential Standard SPS 510 Governance to include a requirement for RSE licensees to establish, as part of their governance framework, a policy which addresses how the materiality of such relationships will be determined when assessing the independence of current or potential directors.

To support this proposed change, APRA also proposes to include in Prudential Practice Guide SPG 510 Governance guidance on key factors that may be relevant to RSE licensees when they are developing their policies to address this new requirement. APRA welcomes feedback on these additional proposals.

Draft Prudential Standard SPS 510 Governance proposes that RSE licensees be required to undertake an annual assessment of the independence of directors. As part of this assessment, APRA expects that an RSE licensee would assess the number of employees of a large employer sponsor to ensure that it continues to satisfy s. 87(1)(f)(i). APRA does not expect RSE licensees to continually assess the number of employees of a large employer sponsor if a director or executive officer of that large employer sponsor is appointed as an independent director. Should an RSE licensee become aware of a change in the number of employees of a large employee sponsor before the annual assessment, however, APRA expects the RSE licensee would consider at that time whether the change would alter the assessment of independence of the relevant director.

3. Are existing RSE licensee directors permitted to be reclassified as independent directors?

Yes, an existing RSE licensee director can be reclassified as an independent director where that director satisfies:

the definition of independent set out in proposed s. 87 of the Superannuation Legislation Amendment (Trustee Governance) Bill 2015; and
any other factors set out in the Board’s nomination, appointment and removal policies relevant to determining whether a person is independent or not, including, but not limited to, the length of a director’s tenure.

4. How will APRA respond if an RSE licensee that intends to cease operating does not do so by the end of the transition period?

APRA expects that all RSE licensees will be in a position to comply with the new requirements from 1 July 2013. However, APRA recognises that in some instances an RSE licensee may be working towards compliance, but may not have been able to fully comply for good reasons. In such instances, RSE licensees will need to apply to APRA for a transitional exemption and APRA will determine whether a transitional exemption is warranted.

Prudential standards and guidance - general

10. What are APRA’s expectations in respect to potential transitional exemptions from prudential standards?

63. Does the introduction of the superannuation prudential standards affect the conditions on my RSE licence?

The SIS Act empowers APRA to make prudential standards. To the extent that there is any inconsistency between the terms of a prudential standard and the terms of a licence condition, the prudential standard prevails.

Licence conditions imposed prior to the commencement of prudential standards will continue to apply to the extent that the condition is not inconsistent with the prudential standards.

APRA will be conducting reviews of RSE licences as a result of the introduction of the prudential standards. This will commence after an RSE licensee has met its operational risk financial requirement (ORFR) target amount and may result in the amendment or removal of conditions on RSE licences as discussed below. APRA supervisory staff will liaise with RSE licensees prior to making changes to licence conditions.

APRA’s general approach to each of the categories of general additional RSE licence conditions will be:

In relation to A (Provision of information conditions): with the exception of notification requirements in condition A3, APRA expects to ultimately revoke these conditions. APRA may also impose a new condition to require notification of a change in name of the RSE licensee, an RSE or a MySuper product.
In relation to B (Insurance and contingency conditions): APRA expects this condition will be revoked as SIS Regulations and prudential standards now operate in this area. SIS regulation 4.07E provides that an RSE licensee is prohibited from providing insured benefits for members unless they are supported by an insurance policy from an insurer. In other words, an RSE licensee is not able to self-insure. There are some transitional provisions in the regulation, and some exceptions for defined benefit funds.
In relation to C – G inclusive (capital conditions): these conditions articulate the method to be used by an RSE licensee to meet capital requirements under s. 29DA of the SIS Act. The prudential standards will have an effect on the capital conditions as the capital requirements are being replaced by the ORFR. Further details on how meeting the ORFR will affect your compliance with the capital conditions are in FAQ 61.
Condition H (definitions) will be retained.
In relation to the requirement to establish a policy committee (where imposed): this condition will be retained.

Licence conditions that have been specifically imposed on a particular RSE licensee will be reviewed on a case by case basis. Variation or revocation will be a matter for consideration by APRA supervisory staff.

66. Section 29WA(2) of the Superannuation Industry (Supervision) Act 1993 requires that a RSE licensee must treat contributions in relation to which the member has not given any direction as a contribution to be paid into a MySuper product from 1 January 2014. What are APRA's expectations regarding RSE licensess engaging with employers where the RSE licensee is the licensee of an RSE that is not seeking MySuper authorisation or is seeking MySuper authorisation but may not have a MySuper authorisation at 1 January 2014?

APRA expects that an RSE licensee who does not expect to have an authorised MySuper product as at 1 January 2014 will, as soon as possible, inform all employer sponsors that the RSE will be unable to receive default contributions from 1 January 2014 in the absence of all applicable members completing ‘choice’ documentation. Employers should be advised, within sufficient time, to make necessary arrangements to identify a fund that is authorised to offer a MySuper product into which they can make default contributions from that date.

Audit

30: What is APRA’s view on the distinction between the work of the internal auditor versus the work of the external auditor?

The external auditor has a specific role and duties that it must perform, such as the completion of the annual audit report. This report must include statements of the auditor’s opinion on matters including compliance with prudential requirements and compliance with the risk management framework (which includes the risk management declaration).

One of the roles of the internal auditor is to provide the board and the Board Audit Committee with further independent assurance that the risk management framework and the operational risk financial requirement are appropriate, consistently implemented and effective. This is a broader, less prescribed role with an enhanced focus on matters such as the adequacy and effectiveness of approaches.

67. Is an RSE auditor required to complete the auditor’s report for an RSE with a non-30 June year end, for periods ending on or after 1 July 2013, in the latest Approved Form of Audit Report? (added 25 February 2014)

Prudential Standard SPS 310 Audit and Related Matters (SPS 310) commenced on 1 July 2013 and, as a result, for an RSE with a non-30 June year end, the auditor’s report for periods ending on or after 1 July 2013 must be completed in the latest Approved Form of Audit Report (the Approved Form). The following illustrates how the Approved Form applies to an RSE with a year end of 31 December 2013.

Part 1 of the Approved Form – audit of financial statements for the year ended 31 December 2013;
Part 2A of the Approved Form – audit of applicable APRA Annual Return Forms for the year ended 31 December 2013;
Part 2B of the Approved Form – audit of RSE licensee’s compliance with applicable provisions for the year ended 31 December 2013;
Part 3A of the Approved Form – review of applicable APRA Annual Return Forms for the year ended 31 December 2013; and
Part 3B of the Approved Form - review of RSE licensee’s systems, procedures and internal controls, and compliance with its risk management framework and operational risk financial requirement strategy for the period 1 July 2013 to 31 December 2013.

69. Is an RSE auditor required to review data reported under Reporting Standard SRS 540.0 Fees in respect of both an RSE and a MySuper product? (added 1 April 2014)

APRA has identified an omission in Attachment B of Prudential Standard SPS 310 Audit and Related Matters (SPS 310) in respect of the requirement to provide limited assurance on compliance with SRS 540.0. The limited assurance requirement relating to SRS 540.0 applies only in respect of MySuper products. A limited assurance review of data reported under SRS 540.0 is not required in respect of an RSE as a whole.

APRA will formally amend Attachment B of SPS 310 to reflect this position in due course.

44. Can the conflicts management policy required by Prudential Standard SPS 521 Conflicts of Interest (SPS 521) jointly address the requirements of SPS 521 and ASIC Regulatory Guide 181 (RG 181) if the RSE licensee also holds an Australian Financial Service Licence?

One conflicts management policy could address the requirements of SPS 521 and RG 181. APRA would expect the RSE Licensee to appropriately address in such a single policy any differences in the provisions and scope of SPS 521 and RG 181 so that all the requirements of SPS 521 are also met.

Fit and Proper

26. What are APRA’s expectations on the requirement to assess the fitness and propriety of responsible persons from material outsourced service providers, including whether there can be a reduced assessment process where the service provider is a prudentially regulated entity?

APRA expects RSE licensees to take a reasonable approach to assessing the fitness and propriety of responsible persons that are employed by a service provider; the obligation is on an RSE licensee to satisfy itself that all of the responsible persons relevant to their business operations have been assessed as fit and proper.

The practical extent of a fit and proper assessment for a responsible person employed by a service provider will depend on the comfort that the RSE licensee has about the assessment/recruitment processes the service provider has in place. If the RSE licensee has any doubts about the rigour of the service provider’s processes to ensure that their staff are fit and proper, the RSE licensee would be expected to undertake a more direct assessment. If the external entity undertakes police checks, however, the RSE licensee is entitled to rely on those police checks.

64. Paragraph 29 of Prudential Standard SPS 520 Fit and Proper (SPS 520) requires an RSE licensee to complete a fit and proper assessment before a person becomes the holder of a responsible person position. What are APRA's expectations regarding this requriement where an RSE is required to appoint the Auditor-General (or equivalent statutory appointment) as RSE auditor?

APRA acknowledges that in the case of statutory appointments, it may not be possible for the RSE licensee to undertake the fit and proper assessment before an individual is appointed as Auditor-General and therefore as a responsible person of the RSE licensee. In such circumstances, APRA expects that an RSE licensee will notify APRA about the personal details of the individual who has been appointed to the position within 14 days (as required by paragraph 45 of SPS 520 and Reporting Standard SRS 520.0 Responsible Persons Information) and will ensure that the fit and proper assessment is completed within 28 days of the person’s appointment.

Operational Risk Financial Requirement

55. If an RSE licensee decides to pass the cost of establishing a reserve for the purposes of the ORFR to members, would this constitute a fee? If so, how is this applied to MySuper members? Must it be charged as an administration fee?

If the RSE licensee decides to fund the ORFR through charges to member accounts, then APRA would expect this to be reflected in administration fees.

59. What are APRA’s expectations in relation to the ORFR for RSE licensees of unfunded defined benefit (DB) funds?

SPS 114 applies to all RSE licensees for the purpose of paragraph 52(8)(b) of the SIS Act. SPS 114 requires each RSE licensee to determine and maintain an appropriate ORFR target amount of financial resources that reflects the operational risks of the RSE licensee’s business operations. APRA recognises that in some circumstances, an RSE that has unfunded DB liabilities may have entered into a government funding arrangement that limits the RSE’s direct exposure to operational risks relating to those DB liabilities. The funding arrangement may be a relevant consideration for the RSE licensee, which may result in a lower ORFR target amount than for other types of DB funds.

61. Do I need to comply with the existing conditions on my RSE licence relating to capital once the prudential standard on ORFR takes effect on 1 July 2013?

Yes, unless you already meet your ORFR target amount on 1 July 2013.

RSE licensees that hold their ORFR target amount as at 1 July 2013 will not be required to comply with the capital conditions on their licences after 1 July 2013. Those RSE licensees must notify APRA within 10 business days after 1 July 2013 that their ORFR target amount was met on 1 July 2013.

If RSE licensees are relying on the transitional arrangements in SPS 114 to build up their ORFR target amount, APRA confirms that those transitional arrangements end once their nominated ORFR target amount has been met for the first time. The RSE licensee must notify APRA within 10 business days when the ORFR target amount is met for the first time. The RSE licensee will not be required to comply with the capital conditions on its licence once the ORFR target amount is met.

70. Can an RSE licensee manage an operational risk reserve, for the purpose of meeting the ORFR target amount, as a general ledger balancing item? (added 17 September 2014)

No, it is not acceptable for an RSE licensee to maintain an operational risk reserve as a general ledger balancing item.

A general ledger balancing item would be expected to fluctuate between time-periods and this would not meet the requirements of paragraph 17 of Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114).

Paragraph 17 of SPS 114 states that an RSE licensee may only use the financial resources held to meet the ORFR target amount to make a payment to address an operational risk event or to enable it to meet the requirements in paragraphs 19 (h) and (i) of SPS 114. These requirements deal with changes in the size of the ORFR target amount in the event of changes in the size, business mix and complexity of an RSE or the wind-up of an RSE.

Furthermore, paragraphs 18 and 19 (e) of SPS 114 require an RSE licensee to have an ORFR strategy, approved by the board, which must describe (among other things) the investment strategy for maintaining the reserves held to meet the ORFR target amount. Maintaining an operational risk reserve as a general ledger balancing item would not be consistent with this requirement.

Outsourcing

65. What are APRA’s expectations regarding liability and indemnity provisions relating to sub-contracting in outsourcing agreements?

Prudential Standard SPS 231 Outsourcing (SPS 231) requires that an outsourcing agreement must, at a minimum, address a number of matters, including liability and indemnity, sub-contracting and insurance. Paragraph 22 of SPS 231 provides that there must be an indemnity to the effect that the service provider is responsible to the RSE licensee for the actions of any subcontractor. This requirement is independent of any rights or action the service provider may have against the subcontractor.

APRA’s view is that whilst SPS 231 requires the outsourcing agreement to cover ‘any liability’, this provision does not prohibit the RSE licensee and the service provider agreeing to a limit on the service provider’s liability and indemnities. This agreement between the RSE licensee and the service provider may, for example, be to reflect accepted business practices. This position is reflected in Prudential Practice Guide SPG 231 Outsourcing (SPG 231), which makes allowance for situations where liability for negligence may be limited and includes reference to sub-contracting arrangements. APRA also expects that any possible limitations in the liability and indemnity provided under the contract be considered within the RSE licensee’s risk management framework and when considering a suitable level for the operational risk financial requirement target amount and tolerance limit.

Insurance in superannuation

68. Is it possible for an RSE to continue to have a permanent incapacity (TPD) definition which is a combination of the definition in the SIS Regulations plus another test, in order to be eligible to be paid a TPD benefit? (added 1 April 2014)

SIS Regulation 4.07D(2) states that a trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of a fund unless the insured event is consistent with specified conditions of release that are specified in Schedule 1. Permanent incapacity is one of the specified conditions of release. SIS Regulation 4.07D(3) makes certain exceptions to this prohibition, to permit the continued provision of other benefits to members who joined a fund prior to 1 July 2014 (see below).

The definition of permanent incapacity

The definition of permanent incapacity in subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) states that a member of a superannuation fund will be taken as suffering from permanent incapacity for the purposes of the SIS Act if the member’s incapacity falls within the definition of permanent incapacity as defined in the SIS Regulations. Under SIS Regulation 1.03C, the trustee must be reasonably satisfied that the person’s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience for a member of a superannuation fund to be taken to be suffering permanent incapacity. (SIS Regulation 4.07D(3) makes certain exceptions to the prohibition in SIS Regulation 4.07D(2), and provides in particular that the prohibition does not apply to the continued provision of benefits to members who joined a fund prior to 1 July 2014).

Where TPD insurance (referred to as permanent incapacity in the SIS Act) is provided by an RSE to a member under section 68AA of the SIS Act and the exceptions do not apply, a benefit is generally only accessible to the member on the grounds of permanent incapacity if the member meets:

the permanent incapacity definition (to access the money); and
the TPD definition under the insurance contract (for the insurer to pay the claim).

Application of the permanent incapacity definition

The definition of TPD under the insurance contract may differ to the definition of permanent incapacity under the SIS Act, depending on the contract negotiated between the trustee and the insurer. Such a difference will not contravene the SIS Act if the difference is not inconsistent with the condition of release under SIS Reg 1.03C. As outlined in the explanatory statement to Select Legislative Instrument 2013 No. 26, compliance with SIS Reg 4.07D is not intended to require the strict adoption of the SIS Regulations definition of permanent incapacity so long as it is consistent with the condition of release.

The context of the RSE licensee’s obligations in insurance

The RSE licensee’s decision on its insurance offering must be taken in the context of the following statutory obligations:

exercising the care, skill and diligence of a prudent superannuation trustee under paragraph 52(2)(b) of the SIS Act;
performing the duties of a trustee, and exercising the trustee’s powers, in the best interests of beneficiaries under paragraph 52(2)(c) of the SIS Act;
acting fairly in dealing with all of the classes of beneficiaries within the fund, under paragraph 52(2)(e) of the SIS Act;
acting fairly in dealing with beneficiaries within a class within the fund, under paragraph 52(2)(f) of the SIS Act;
considering the cost to all beneficiaries of offering or acquiring insurance of a particular kind, or at a particular level, under paragraph 52(7)(b) of the SIS Act; and
to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement incomes of beneficiaries, under paragraph 52(7)(c) of the SIS Act.

Under Prudential Standard SPS 250 Insurance in Superannuation (SPS 250), the selection process that the RSE licensee undertakes to choose an insurer must include a consideration of the prospective insurer’s terms of cover and exclusions, the reasonableness of the premiums to be charged and the claims process. It must also be able to demonstrate to APRA that the selection process was appropriate and that the engagement of the insurer was in the best interests of the beneficiaries, under paragraphs 22 and 23 of SPS 250.

In addition, in a MySuper context, such restrictions will only be acceptable if the trustee has also reached the view under subsection 68AA(3) that such restrictions are reasonable and promote the financial interests of the beneficiaries of the fund who hold the MySuper product, under section 29VN of the SIS Act.

24. In the event of the death of a member, an RSE licensee may choose to invest life insurance proceeds in an investment option with a conservative investment strategy. In the event a member has an interest in a MySuper product will the proceeds need to be invested in the MySuper product?

Insurance proceeds are not a contribution in respect of the member. It is a payment by the insurer to the RSE licensee, which is then allocated by the RSE licensee to non-member beneficiary(ies). On that basis, the insurance proceeds can be held in an investment option in accordance with the RSE licensee’s predetermined policy.

The member’s existing interest in a MySuper product may be moved to another class of beneficial interest in the fund where the member has died and the replacement meets any criteria prescribed in the SIS Regulations (see 29TC(1)(g) of the Superannuation Industry (Supervision) Act 1993). This could be done to reduce risk and preserve the balance accumulated by the member until a beneficiary can be identified and the benefits paid out.

43. Can an RSE licensee, on receipt of TPD insurance benefits, deposit this amount into a cash option until the member advises the investment option they wish the monies to be transferred to? Where the member does not respond within a reasonable period, can the RSE licensee choose to transfer the monies to the MySuper product option?

APRA is comfortable with an RSE licensee taking this approach. APRA would expect the RSE licensee to disclose its approach to members.: APRA is comfortable with an RSE licensee taking this approach. APRA would expect the RSE licensee to disclose its approach to members.

Payment standards

Regulations 6.28 and 6.29 of the Superannuation Industry (Supervision) Regulations 1994 (The SIS Regulations) respectively prohibit the rollover and transfer of a member’s benefits from a fund unless:

the member has given the RSE licensee their consent to the rollover or transfer;
the RSE Licensee believes on reasonable grounds that the receiving trustee has received the member’s consent to the transfer; or
in the case of a transfer, the transfer is to a successor fund or for the purposes of transferring accrued default amounts under specified provisions of the SIS Act.

APRA, under the SIS Regulations, has the power to determine a form of consent that is sufficient to accept rollovers and transfers.

On 31 January 2002, APRA issued the determination, Form of Non Written Consent Sufficient for Rolling Over or Transferring Benefits (the Determination).

The Determination permits a member’s consent for a rollover or transfer to be transmitted electronically, orally or in any other non-written form, if the RSE licensee complies with requirements specified in the Determination.

The SIS Regulations have been amended since the Determination was issued to require RSE licensees to accept electronic rollover requests. However, the Determination remains valid and continues to permit electronic, oral and other non-written consent to rollovers and transfers.

APRA will consider in due course whether updated guidance on non-written consent for rollovers and transfers would be appropriate in light of the amendments to the SIS Regulations and recent technological developments.