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 cont’d • 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 APRA’s 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 cont’d • 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 cont’d • 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