The Australian Prudential Regulation Authority (“APRA”) this week released two draft Superannuation Prudential Practice Guides (“SPGs”). When finalised, the draft SPGs will replace existing APRA guidance on the contribution, benefit accrual and payment standards under the SIS Act and Regulations.
The draft SPGs provide APRA’s “practical guidance” on how the legislative requirements in relation to these standards can be met by trustees, and what APRA will regard as sound practice.
The new SPGs are:
- SPG 270 - Contribution and benefit accrual standards for regulated superannuation funds
- SPG 280 - Payment standards for regulated superannuation funds and approved deposit funds
APRA says it does not expect the draft SPGs to require significant amendment following the release of the Government’s response to the Super System Review.
The draft SPGs are accompanied by a discussion paper summarising at a high level the key changes from APRA’s existing guidance on these issues. This alerts contains some more detail about these changes. The changes largely focus on additional “practical guidance” rather than more detailed explanation of the law. Some of this guidance does not appear to have any legislative basis.
Contribution and benefit accrual standards (Draft SPG 270)
Draft SPG 270 will replace Superannuation Circular No. I.A.1 Contribution and Benefit Accrual Standards for Regulated Superannuation Funds, Update on classification of superannuation contributions, and information previously contained in Frequently Asked Questions – Clearing Houses.
The draft SPG includes the following additional guidance:
Contributions made in error: APRA says that it is good practice for trustees to establish a policy on the classification and treatment of contributions made “in error” and consequences of such contributions, and for this to be communicated to members and potential members. Additional guidance in formulating such a policy includes:
- Errors in allocating an amount to the wrong member, account, fund or investment option, or allocating the wrong amount, could be categorised as “internal/fund administrative errors”, “intermediary’s administrative errors” or a “contributor’s instruction errors”.
- Internal/fund and intermediary’s errors may usually be rectified without breaching the SIS Part 6 preservation standards.
- In relation to contributor’s instruction errors, APRA says that, “[a]lthough the account, fund and investment option details may be rectified, the recipient member and the amount cannot be altered unless an exemption from APRA is obtained” of the payment standard in SIS Regulation 6.17(2). An exemption requires demonstrating special circumstances, and APRA considers that a decision to pay the amount “based in part or wholly on the member’s incorrect or inadequate knowledge or on incorrect or inadequate advice” is not likely to be regarded as special circumstances. This guidance by APRA does not appear to recognise that some payments made in the nature of genuine mistake, not intended as contributions, may be refunded by the trustee under the legal principles of unjust enrichment and restitution (as recognised in ATO guidance), although APRA says that “it would be helpful” for the trustee to consider the ATO’s guidance and obtain legal advice about these matters. APRA appears to suggest that the restrictions in the SIS Regulations apply despite the general law remedies, and that trustees must obtain relief in cases requiring repayment due to mistake.
- In relation to errors that may be rectified according to these principles, the contributions will remain preserved unless the error consists of an allocation in excess of the correct amount, in which case the excess may be returned.
- Risk management: APRA states that it is sound practice to include possible risks arising from the acceptance and processing of contributions in the trustee’s Risk Management Framework and Risk Management Strategy. It encourages trustees to improve the reliability of contributions data, including the details of the source, amount, tax and other classification, and identity of the destination.
Validity of contributions:
- APRA considers it is good practice for the trustee to establish, monitor and review policies and procedures regarding the acceptance, classification and allocation of contributions, including measures in relation to breaches of the standards.
- Trustees should ensure that contribution processing systems can determine the validity of any contributions received, including the correct classification of the contributions and member details.
- “Prudent trustees” should develop policies and procedures regarding dealing with contributions received in advance of the receipt of a membership application, to ensure contributions are only received in respect of a member.
- Fund capped contributions: The fund’s contribution processing system should be able to recognise and deal with fund-capped contributions on a contribution-by-contribution basis. APRA has no power to grant an exemption from the requirement to return excess contributions, and it confirms that the contribution must be returned as soon as the trustee become aware of the breach, even if that occurs more than 30 days after acceptance (consistent with ATO guidance).
- Residency and identity of contributor: The validity of contributions is not affected by the overseas residency of a member, and in respect of members under age 70, by the identity of the contributor.
- Timing of contribution: “Best practice” is that the trustee establish and advise members and potential members of the procedures it will apply in relation to the timing of processing of applications to invest contributions. The timing of contributions is determined by a combination of fund procedures and rules, but is subject to the legal requirements in the SIS Regulations. APRA refers trustees to guidance given to SMSFs on these matters by the ATO.
Contributions in respect of an earlier period: APRA considers that the provisions in the SIS Regulations allowing a trustee to accept a contribution if it is satisfied that it relates to a previous period in which the fund may have accepted the contribution:
- do not cover a contribution that is late merely because it derives from the proceeds of sale of an asset or investment owned during the relevant period;
- but could be used to accept a contribution made by an employer that relates to an earlier employment period, or that was erroneously allocated to another member and the late contribution is a correction of the mistake.
- Clearing house services: APRA considers that the supply of clearing house services by the trustee or an associate would not breach the “kickback provisions” under section 68A of the SIS Act, but the risks of providing such a service should be documented in the trustee’s RMS. A trustee may also need to determine whether clearing house services are captured by the outsourcing standard.
- Leave and gainful employment: APRA regards periods of authorised leave, whether paid or unpaid, to be periods of gainful employment for the purposes of the gainful employment test for contributions in respect of members aged 65 or over.
Payment standards (SPG 280)
Draft SPG 280 will replace Superannuation Circular No. I.C.2 Payment Standards for Regulated Superannuation Funds, Superannuation Circular No. I.C.3 Payment Standards for Approved Deposit Funds, and additional advice, generally in the form of letters to industry, on illegal early release and portability relief applications (made under SIS Regulation 6.37).
The draft SPG includes the following additional guidance:
- Risk management: APRA says it is sound practice for trustees to include possible risks arising from the processing and payment of benefits in the trustee’s Risk Management Framework and Risk Management Strategy.
- Administration: It is good practice for the trustee to establish, monitor, and review policies and procedures regarding the acceptance, identification and processing of applications to pay, transfer or rollover benefits. These should cover steps to be taken in case of breach, details of the unit pricing policy and who bears the risk during the time between application and payment. It expects trustees to develop unit pricing policies and investment options applicable during this period, including for example offering a more conservative investment option for the period between notification of death and payment of death benefit.
- Data administration and processing: The draft sets out APRA’s expectations about what are adequate data administration and processing systems with respect to benefit payments.
- Pensions: APRA expects funds offering pensions to include in their policies and procedures appropriate measures and controls to deal with the complexity of regulatory restrictions (such as commutation restrictions) and liquidity and cashflow issues that relate to the types of pensions offered. In relation to liquidity and cashflow, trustees may consider restricting the choice of underlying assets or the proportion of certain investment options that may be used to support the pension. APRA says that, in the current economic environment, a suitable approach may be to ensure that at least three years’ worth of minimum pension payments is invested in highly liquid investments. The policies should also cover the funds’ treatment of deferred tax liabilities and assets.
Illegal early release and identity theft/fraud: APRA expects trustees to identify and mitigate the risk of identity fraud and illegal early release of benefits, including setting out systems and procedures to deal with these risks in the trustee’s RMS. APRA’s suggested practices include the following checks:
- proof of identity checks of the member
- checks of status of the SMSF and that the applicant is a member via the ATO’s website
- checks on the rollover or transfer paperwork
- any other checks that are reasonable in order to confirm the validity of the rollover or transfer, eg contacting the member using White Pages address/phone number, email or via employer. APRA says that a trustee might have reasonable grounds for suspicion in situations such as a change to member details just prior to a request for a rollover or transfer.
APRA says that generally, once these checks are complete, and unless there are still reasonable grounds for suspicion being pursued, the trustee should promptly rollover or transfer the amount to the SMSF.
- Portability relief: APRA gives some additional guidance on the information it expects in an application for portability relief. It expects that the application be submitted as soon as possible before the 30-day portability deadline expires, that it contain an explanation or reasons for the inability to comply with the request, that the controls in place to ensure that the situation is rectified are adequate, and appropriate disclosure and communication is made to affected members.
- Death benefit payments: APRA provides some general guidance on when and how a death benefit should be paid. APRA includes in the types of possible death benefit arrangements a “non-lapsing nomination” under section 59(1)(a) of the SIS Act. Of some interest is APRA’s view that, as “part of the trustee’s obligations to act in the best interest of members, APRA recommends that death benefit payment procedures and systems specifically cover the trustee’s policy regarding claiming a tax deduction where a lump-sum death benefits are paid”, ie where the tax anti-detriment provisions are used. APRA says that the trustee should explicitly disclose to members if it has a policy of not claiming the available deduction.
- Unit pricing errors: APRA states that, where a unit pricing or crediting rate error results in a former member of the fund being paid less than their full entitlement, the trustee may satisfy its obligation to compensate the former member by rolling over the amount to the member’s new fund. Where the trustee cannot find the new fund, and the amount is between $20 and $200, the trustee may send the relevant amount to the former member.
The draft SPGs are available on the APRA website. APRA is seeking comments on the drafts by 31 October 2011. It proposes to issue final versions in December 2011, with an immediate effective date.