FSC SUBMISISON APRA PRUDENTIAL PRACTICE GUIDES FOR SUPERANNUATION
Draft SPG 114 – Operational Risk Financial Requirement
ORFR target amount
In paragraph 9 of draft SPG 114, APRA states its expectations that a soundly run RSE licensee that has
implemented an effective risk management framework would have an ORFR target amount of at
least 0.25 per cent of funds under management. Further, in paragraph 10, APRA states that it expects
that an RSE licensee will consider circumstances when more than this amount may be appropriate
while signalling that there may be some circumstances where less than this guideline amount would
be appropriate.
It would be helpful for APRA to provide further transparency as to how the benchmark amount of
0.25 per cent of funds under management was arrived, for RSE licensees to be able to determine
whether it is appropriate to target that amount or a higher/lower level. In particular, it would be
helpful for RSE licensees to understand the risk tolerance or confidence level (in a statistical sense)
on which the benchmark of 0.25 per cent was based. This is critical when considering that, if capital
costs from accruing the target amount are passed onto members, where a specific business has a
sound reason for having target lower than APRA’s broad-market estimate, members will ultimately
benefit.
Furthermore, understanding this could benefit an RSE licensee conducting the annual review of the
ORFR target amount (paragraphs 36-38).
Other matters
Two other specific areas of comment are:
Paragraph 14 could have the unintended consequence of discouraging an RSE licensee from
entering into arrangements that could provide it with a compensation payment to address
the cost of an operational risk event as the RSE licensee is unable to adjust the target ORFR
amount for such arrangements. Furthermore, given that any member compensation is likely
to take time to determine the appropriate amounts and to arrange for compensation to
members, the draft SPG appears to be overly pessimistic in terms of the RSE licensee’s ability
to obtain the reimbursement from a third party within an appropriate timeframe for
compensating members. It also seems reasonable for an RSE licensee to consider the relative
merits of reducing a member’s benefits now (by an additional charge to fund the ORFR)
versus some delay in compensating members for actual events while a recovery from a third
party is pursued.
In Paragraph 35, APRA appropriately comments that the financial resources held to meet the
ORFR target amount may be used if it is appropriate to reduce the ORFR target amount.
However, the example used could be misinterpreted as a requirement that in the event of an
successor fund transfer, there must be a transfer of financial resources being used to meet
the ORFR target to the receiving fund. Such situations should be treated on a case by case
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basis by an RSE licensee. Further, the financial resources for the ORFR target amount should
not be considered to be allocated to different groups of members.
Recommendation
APRA:
Provides further transparency on the basis on which APRA’s target amount of 0.25 per cent
of funds under management was determined by APRA.
Reconsiders the stance on compensation arrangements so as not to discourage RSE licensees
from entering into such arrangements.
Removes the example in paragraph 35 as it could be misinterpreted, or alternatively delete
the reference to transferring ORFR resources to the receiving fund.
Draft SPG 250 – Insurance in Superannuation
Level of detail required to be held by the RSE licensee
There is an emphasis throughout draft SPG 250 on the RSE licensee having to maintain or collect
information. However, it should be open to the RSE licensee to determine the applicability of holding
this data itself or having an arrangement with another party (either the administrator or insurer)
through which it can access the information in an agreed timeframe – the current notion of the RSE
licensee holding data itself requires the RSE licensee to consider how it refreshes the data, as well as
issues such as data access and security.
Also, draft SPG 250 seems to assume that the framework and strategy should include a level of detail
that can only be determined in a particular case, eg in agreeing an insurance arrangement with a
particular insurer or in conducting a particular review/tender process
Some specific examples are:
Paragraph 18 – the second sentence sets out information to be maintained usually “at a
minimum” with a specific list of information. An alternative approach is to replace this
sentence with “An RSE licensee should consider the type of information it may require to
adequately monitor its insurance arrangement.”
Paragraph 20 – the list of information that APRA considers to be good practice for an RSE
licensee to maintain in relation to history of design of insured benefits and membership in
each type of insurance is overly burdensome for an RSE licensee when there are many
categories of membership (eg, for different employer superannuation plans), with different
insurance arrangements which have been priced from time to time based on the
membership of those categories. It would be helpful for APRA to provide reasoning as to the
intent of this paragraph 20 so that an RSE licensee can maintain appropriate level of records
to meet the intent.
Selection of insurer
Paragraphs 22-24 of SPS 250 set out the requirements on an RSE licensee in relation to selecting and
monitoring of insurers. The wording of “selection” in SPS 250 is presumably deliberately chosen as a
broad term, as there is no reference to “tender” in SPS 250. More generally, the draft SPG seems to
be written primarily in the context of a new RSE ie first needing to select and then monitor an
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insurer. Given that most, if not all, RSEs would have one or more existing insurers in place, a greater
emphasis on “review of insurer” rather than “selection of insurer” would seem appropriate.
In contrast, draft SPG 250 has several references to the narrower term of “tender” rather than
“selection” (see paragraphs 14, 31, 32 and 39). This narrower term is not appropriate (or necessary)
as SPG 250 has made it clear what the obligations are for an RSE licensee when selecting an insurer.
For some RSE licensees, conducting a tender may be inappropriate given their operating model.
Also in relation to selection of insurer, paragraph 38 states that an “RSE licensee would be expected,
when selecting an insurer, to consider whether another party will pay some or all of the premiums”.
It is not clear why this would be a consideration in selecting an insurer.
Application to retail insurance
There are a number of sections in draft SPG 250 that can only be applied to group insurance
arrangements, and do not consider an RSE licensee that acquires or holds insurance through
individual insurance such as new retail insurance or legacy policies.
The areas that have not considered the individual insurance are largely those that deal with data
management (paragraph 14) and selection of insurer (in particular paragraphs 30-35), where there
an assumption the information is relevant for a tender of insurance (which does not occur for
individual insurance).
Equally, the majority of the Guide seems to be tailored to RSE licensees with a single RSE containing a
single insurance structure for all members (and generally with a single insurer).
A review of each section of the draft Guide should be undertaken to consider if the same principles
apply in regard to retail policies, and to an RSE licensee with different insurance structures and/or
different insurers.
Cross over with insurer’s processes
Some of the guidance suggests that an RSE licensee gather information which relates to an insurer’s
key businesses processes, including underwriting and claims assessment processes. While it is
appropriate for an RSE licensee to understand underwriting and claims philosophy, some of the
information suggested is very specific and could be seen to affect/ influence the insurer – for
example, some of the information set out in paragraphs 36 and 40.
Recommendation
APRA:
Reconsiders the level of detail it suggests that an RSE licensee holds and manages under SPS
250 to ensure that the information held is appropriate, relevant and manageable and/or
recognises that the data may be held by another party on behalf of the RSE licensee.
Clarifies that selecting and monitoring of an insurer does necessitate a tender process.
Reviews the draft Guide to ensure that the principles can be applied by an RSE licensee with
individual insurance policies and/or different insurance structures including having more
than one insurer and more clearly recognises that for existing RSEs the starting point is a
review process rather than a selection process.
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Considers the need for information which reaches into how an insurer manages its business.
Draft SPG 530 – Investment Strategy – Formulation and draft SPG 531 – Investment Strategy –
Implementation
Superannuation “platform” offerings
Draft SPG530 and SPG531 may be unworkable for some superannuation “platform” providers, which
are based on offering members an extensive range of investment options.
The guidance applies in a way which could be interpreted as inconsistent with the legislative intent
on the Explanatory Memorandum below. For example, in relation to diversification, draft SPG 530
appears to require trustees of platforms to consider what level of diversification is appropriate for
members (see, paragraphs 27-31).
This is inconsistent with the intent of the Superannuation Legislation Amendment (Trustee
Obligations and Prudential Standards) Act 2012 – the Explanatory Memorandum in relation to its
discussion on the issue of diversification stated:
In formulating the fund level investment strategy, trustees decide the type and number of
options they offer to members. Trustees will have to offer investment options which will
allow a member to obtain a diversified asset mix if they choose. [Schedule 1, item 12,
paragraph 52(6)(c)]. If a member chooses to be undiversified, the trustee has no obligation
to assess the appropriateness for that member of the investment strategy chosen by the
member beyond the aforementioned requirement to formulate and give effect to an
investment strategy in respect of each investment choice option. [Schedule 1, item 12,
paragraph 52(6)(c)] (see, paragraphs 1.87-1.88).
The Explanatory Memorandum is clear that trustee have no obligation to assess the appropriateness
of the investment strategy chosen by a member. We therefore recommend that APRA aligns its
guidance with the statement above from the Explanatory Memorandum.
A further point in relation to superannuation “platform” offerings is that SPG530 states that the RSE
must approve investment objectives and strategies for the RSE and each investment option as well as
monitor and assess regularly whether investment objectives are being met. It would be impractical
for every change to the investment menus and every change to an existing investment option’s
objectives and strategies to go to the full RSE Board for approval, particularly for platform funds,
which could involve reviewing the performance of hundreds of investment options every quarter.
Confirmation that the RSE Board can delegate its obligations under “The role of the Board” in SPS530
to an investment committee would be helpful.
The following comments relate to more specific issues under each of SPG530 and SPG531.
Draft SPG 530 -Stress Testing
Stress testing & liquidity management for platforms
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We query the practicality of stress testing and developing a liquidity management plan for Trustees
of wrap platforms. Fundamentally members have discrete investment holdings and the liquidity of a
member’s investment is not affected by the liquidity of other members’ holdings. Ultimately stress
testing the investment strategy / options of the platform is unlikely to assist Trustee risk
management. We are also concerned there will be an additional cost of the requirements,
particularly where there are a large number of investments and with minimal benefit for the member
We believe platforms should be excluded from the requirements to conduct stress testing and
develop a liquidity management plan.
Draft SPG 530 – Investment objectives
Under paragraph 9, where an RSE licensee offers a single security option or an externally managed
investment option they may adopt the existing investment objectives after due consideration. Clarity
over “due consideration” would be appreciated. Guidance would also be appreciated as what needs
to happen in the case that an existing investment options do not meet these requirements as it may
not be in the member’s best interest to sell down their holding from that investment option.
We understand this is the subject of ongoing discussions within the government.
Draft SPG 530 – Cost and tax considerations
Further guidance on tax considerations would be helpful. For example, is the RSE licensee expected
to set different post tax return objectives for the same investment option depending on whether it is
offered through an accumulation or a pension product?
Draft SPS 531 – Currency exposures
The expectations set out in paragraph 36 would impose overly onerous obligations around the
contribution of foreign currency exposures to investment returns, hedge positions, the cost of
maintaining hedges and the effectiveness of hedges that, in the case of externally managed options,
would fall on the external investment manager.
Recommendation
APRA:
Revises draft SPS 530 and SPS 531 to provide suitable, practical guidance for an RSE licensee
with a superannuation platform offering.
Define/illustrate the range of investment options in scope and out of scope.
Delineate the role of the RSEL as Trustee of a Super Fund and as Responsible Entity of a
Managed Investment Scheme (MIS), update the Practice Guides to apply to the RSEL as
Trustee and remove the distinction for “externally managed” MISs.
Provides further guidance in relation to “due consideration” in relation to adopting existing
investment objectives in relation to a single security option or an externally managed option,
and on tax considerations.
Revises the expectations in relation to currency exposures.
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