APRA has today released a discussion paper on prudential standards for superannuation.  The Super System Review (Cooper Review) recommended that APRA be empowered to make prudential standards for superannuation and the Government accepted that recommendation in its Stronger Super response.

Summary of APRA’s proposals

In this part of the alert, we set out a summary of APRA’s proposals, which relate to prudential standards for superannuation, but which also include some key details about transitioning to MySuper.  We provide more details about the key proposed requirements here.

A copy of APRA’s discussion paper is available here.

Matters to be covered in standards

APRA proposes that prudential standards “be extended to the superannuation industry from current banking and insurance prudential standards”, in relation to:

  • governance
  • fit and proper
  • outsourcing
  • business continuity management
  • risk management
  • audit and related matters

APRA also proposes prudential standards “specifically for superannuation”, in relation to:

  • investment governance
  • conflicts of interest
  • defined benefit funding and solvency
  • operational risk financial requirement
  • insurance in superannuation
  • transition to MySuper

The breadth of topics is notable.  APRA’s power will relate to “prudential matters”.  APRA expects the definition of “prudential matters” to be broadly consistent with the definitions for banking, general insurance and life insurance.  However, APRA also says it expects to be able to determine provisions of the Superannuation Industry Supervision (SIS) legislation which can be classed as additional “prudential matters”. 

APRA says that prudential standards are “more flexible than legislation”.  However, the prudential standards will themselves be legislative instruments.  Also, the suggested virtue of “flexibility” is debatable in this context.

APRA also says it aims to achieve “sound prudential outcomes without prescribing the precise manner in which those outcomes should be achieved”.  However, a review of the key proposed requirements suggests APRA is very interested in the details of processes, procedures and frameworks, not just outcomes.  The key proposed requirements are summarised here.

Current and proposed frameworks

Prudential standards for superannuation are currently set out in SIS.  APRA’s views on prudential matters are currently set out in a range of guidance materials, including prudential practice guides, circulars and the like.

Under the proposed new framework:

  • the SIS Act will set out “high-level” obligations and definitions;
  • subordinate legislation, comprising the SIS Regulations and APRA’s prudential standards, will contain more detailed requirements:
    • some existing legislative provisions will be “reframed” as requirements in prudential standards,
    • some of APRA’s existing guidance will be “relocated” (and upgraded) into standards;
  • revised guidance material will be in the form of prudential practice guides. In short, matters that are currently addressed in the SIS Regulations or by APRA guidance will become the subject of APRA’s standards making power, which will allow APRA to give its views on those matters legislative force.

Transition to MySuper

The standard on transitioning to MySuper is expected to include requirements:

  • to identify default members and their existing default balances;
  • for funds with default members, to have a MySuper transition plan for transferring existing default balances to specified MySuper products;
  • to explain how the transfer will be in the best interests of beneficiaries;
  • to have a communication plan for members and employers about the MySuper transition plan.

Identifying default members and their existing default balances is likely to be difficult.  The proposed requirement to explain how the transfer will be in the best interests of beneficiaries makes little sense in a context where trustees are effectively forced to transfer default members to MySuper.

APRA says that trustees that meet specific legislative criteria “may apply to offer more than one MySuper product per fund”.  This suggests that offering multiple MySuper products may not be quite as easy as some may have thought, following Minister Shorten’s recent Stronger Super announcements, which we commented on here.

MySuper authorisation - timetable

APRA expects to commence the MySuper authorisation process in the second half of 2012, to allow MySuper products to be offered from 1 July 2013 onwards.  APRA expects to have power to authorise MySuper products from 1 January 2013, effective 1 July 2013.

Prudential standards - timetable

APRA invites comments on its proposals for the prudential standards.  Comments are due by 23 December 2011.  Early next year, APRA will release draft prudential standards for consultation, they are expected to be finalised “during” 2012 with a view to commencement “during” 2013.

Click here to view more details about the key proposed requirements.