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Attachment
Government Response to the Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System

Chapter 6: Integrity of the system

Recommendation 6.1

New capital requirements for trustees on a risk-weighted basis should be phased-in over time:

  1. the SIS Act should be amended so that the governing rules for all large APRA funds are deemed to include a provision enabling the trustee to maintain a dedicated and identifiable operational risk reserve separate from member account balances;
  2. all large APRA funds must hold a minimum level of operational risk reserve, which reserve cannot be fully offset by trustee capital;
  3. legislation should define a minimum dollar figure for operational risk reserves and a maximum amount, expressed as a percentage of assets in the fund. APRA should have the power to increase the minimum level of capital on a risk-assessed basis. Details of defining a risk weighted requirement between the minimum and maximum should be developed by APRA in consultation with industry;
  4. should APRA's assessment of risk in the fund lead it to the view that it would be appropriate for the fund to hold a higher level of reserve than the maximum amount set out in legislation, APRA should use other tools available to it to cause the trustee to reduce the risk exposure of the fund;
  5. any capital requirement that would otherwise be imposed under the trustee's Australian financial services licence in respect of non-superannuation business should be in addition to the capital requirement imposed under the SIS Act;
  6. trustees of SAFs should be required to hold an amount of net tangible assets in their own right, calculated by APRA having regard to the operational risk reserve that would be required if the aggregate of SAFs under trusteeship were a single fund; and
  7. the capital adequacy requirements for prudentially supervised conglomerate groups should have regard to the operational risk reserves in any superannuation fund or funds that are in the group and adequacy requirements for group trustees should have regard to the risk-weighted assets of the rest of the conglomerate group.

Government response

Support in principle

6.1 (a) to (d) and (f)

The Government considers that the current capital requirements for superannuation fund trustees should be replaced with a risk-based system applying to all APRA-regulated funds for holding financial resources against operational risk, but will consult with relevant stakeholders on whether such a system should require resources to be held in the form of trustee capital or an operational risk reserve within the fund. The Government will also consult on a method for calculating such a requirement.

6.1 (e)

The Government considers that any capital requirement arising from a trustee's non-superannuation business should be in addition to any requirement imposed under the SIS Act.

6.1 (g)

The Government notes the Review's recommendation regarding the interaction between capital requirements for conglomerate groups and requirements for superannuation funds. These issues are the subject of consultation by APRA as part of its proposals to extend its prudential supervision framework to conglomerate groups. APRA has already released a discussion paper on the supervision of conglomerate groups, and will conduct a quantitative impact study in the coming months. APRA expects to release draft prudential standards, reporting standards and forms in respect of its conglomerate proposals for public consultation in 2011. Subject to the consultation process, APRA has advised that it expects to implement the Level 3 framework in 2012.

Recommendation 6.2

The SIS Act should be amended to:

  1. define 'superannuation administrator' and empower APRA to license superannuation administrators, to impose conditions modelled as appropriate on the conditions applicable to RSE licensees, and to enable APRA to impose, modify or revoke additional conditions. Licence conditions should include a risk-weighted capital requirement;
  2. require that trustees may only use a superannuation administrator licensed by APRA for administration functions which are covered by the outsourcing operating standard. This process should be funded by a levy on those administrators;
  3. require commercial clearing houses to be licensed as administrators; and
  4. make clear that the trustee remains liable to the member in the first instance even if the trustee has outsourced administration to a licensed administrator.

Government response

Do not support

Consistent with the approach for other prudentially regulated institutions, the Government does not support APRA licensing of service providers such as administrators or clearing houses. The Government does however support heightened requirements for trustees who deal with administrators and will refer the need for prudential standards in this area to APRA for consideration.

Recommendation 6.3

Obligations imposed by way of licence conditions on external administrators should be replicated where appropriate by variations to the licence conditions of RSE licensees that operate an in-house administration system.

Government response

Support in principle

The Government supports heightened requirements for trustees and will consult with relevant stakeholders on design and implementation issues.

Recommendation 6.4

Section 29PD of the SIS Act should be repealed, so that the trustee is not required to make a copy of the trustee's RMP available to a member or to the employer sponsor in the case of a defined benefit scheme.

Government response

Support in principle

The Government supports removing the requirement that trustees make a copy of their risk management plans (RMPs) available to members or employer sponsors.

Recommendation 6.5

The SIS Act should be amended to provide that, if a trustee makes a formal decision that the RMS fully addresses all risks relevant to one or more of the RSEs under its trusteeship and documents that fact within its RMS, it is not obliged to prepare a separate RMP in relation to the nominated RSE(s).

Government response

Support in principle

The Government supports removing the obligation on trustees to prepare a separate RMP when the risk management strategy (RMS) is considered to be covering all risks relevant to the relevant RSE and will consult with stakeholders on this recommendation.

Recommendation 6.6

The Risk Management Plan should explicitly include a liquidity management component to ensure that trustees identify and manage liquidity risk at both the fund level and the investment option level.

Government response

Support in principle

The Government supports requiring trustees to explicitly include a liquidity management component in their RMPs.

Recommendation 6.7

The exception to the portability rules for illiquid assets should be retained for choice products only, but the member's written consent should no longer be required provided that there is adequate disclosure to the member before they select an illiquid investment option.

Government response

Do not support

The existing portability rules, including the requirement for written consent for illiquid assets, will continue to apply to both MySuper and choice products. Written consent for investments in illiquid assets is necessary to ensure members are fully aware of the consequences for portability of funds.

Recommendation 6.8

Subject to recommendation 6.7, the current portability rules should be retained for both MySuper and choice products.

Government response

Support

The existing portability rules, including the requirement for written consent for illiquid assets, will continue to apply to both MySuper and choice products.

Recommendation 6.9

The trustee's RMP should have particular regard to liquidity characteristics of investment options offered to members in the retirement phase.

Government response

Support in principle

The Government supports requiring trustees to explicitly include material relating to liquidity characteristics of investment options offered to members in the retirement phase in their RMPs.

Recommendation 6.10

APRA should issue a prudential standard that focuses on funding to protect vested benefits and specifies the time period within which a defined benefit fund that is in an unsatisfactory financial position must be restored to a satisfactory financial position, in much the same way that the SIS Act presently addresses insolvency of funds and minimum requisite benefits.

Government response

Support in principle

The Government agrees in principle with this recommendation and will refer it to APRA for consideration.

Recommendation 6.11

The SIS Act should be amended so that a defined benefit fund which is technically insolvent should not be allowed to accept SG Act contributions unless the fund actuary and the trustee form the view that it is reasonable to believe that the fund will be restored to solvency within the period prescribed under the SIS Act.

Government response

Noted

The Government notes the recommendation and will consider whether the current arrangements achieve the right balance between protecting Superannuation Guarantee (Administration) Act 1992 (SG Act) contributions and ensuring funds are solvent.

Recommendation 6.12

The definition of 'superannuation contributions' in the Corporations Act should be clarified so that there is no doubt that defined benefit contributions are afforded the same protection as accumulation contributions.

Government response

Support in principle

The Government will consider this recommendation further and consult with relevant stakeholders.

Recommendation 6.13

Defined benefit funds should automatically qualify as 'default' funds for SG Act purposes in respect of the defined benefit provided to members so long as the fund meets the requirements of the SG Act to receive contributions.

Government response

Support

Defined benefit funds provide members with a certain retirement benefit regardless of the investment returns or fees. The Government considers that these funds should automatically qualify as a MySuper product in respect of defined benefit members and be able to continue to receive contributions in respect of such members that do not make a choice of fund.

Recommendation 6.14

If the defined benefit fund is a hybrid fund, then the MySuper criteria must be met for accumulation members in order for the fund to be accepted as a default fund under the SG Act in respect of those members.

Government response

Support

In respect of members that have an accumulation benefit, a hybrid fund will be required to meet the MySuper criteria to continue to be a default fund for those members.

Recommendation 6.15

If a member has both defined benefits and accumulation benefits as part of the defined benefit fund's benefit design, and the accumulation benefit is not necessary to meet the employer's SG Act obligations, then the MySuper criteria do not have to be met in respect of those members.

Government response

Support

If a fund's defined benefit component satisfies the SG Act obligations of each employer making contributions to the fund, it will automatically qualify as a MySuper product and be able to continue to receive contributions from members that do not choose a fund.

Recommendation 6.16

Trustees of defined benefit funds (or sub-plans) that are presently allowed to self-insure death and TPD benefits should continue to be allowed to do so.

Government response

Support in principle

The Government supports in principle allowing trustees of defined benefit funds (or sub-plans) that are currently allowed to self-insure death and TPD benefits to continue with such practices.

Recommendation 6.17

In developing investment strategies, trustees should explicitly consider both short and long term risks, consistent with their stated investment horizon. Trustees would not be required to make decisions based on ESG issues but as ESG issues represent one type of long term risk, trustees should consider ESG issues as they think appropriate.

Government response

Support in principle

The Government agrees that environmental, social and governance (ESG) issues are a matter for trustees to consider.

Recommendation 6.18

The government should not mandate that superannuation fund trustees participate in any particular investment class or vehicle, including infrastructure.

Government response

Support

The Government agrees that investment decisions are a matter for trustees.