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Frequently Asked Questions - Archived

Note: the numbering of these questions is fixed and will not change as new questions are added.

Updated: 29 March 2016

Prudential Standards and Guidance - General

FAQ 3: When do the eleven prudential standards commence?

FAQ 4: What are prudential standards?

FAQ 5: How many prudential standards has APRA issued for superannuation? 

FAQ 6: What happens if an RSE licensee does not follow APRA’s prudential standards?

FAQ 7: Do prudential standards exist for any other industry?

FAQ 8: What is the difference between a prudential standard and a prudential practice guide, both of which are issued by APRA?

FAQ 11: Is s. 52 of the Superannuation Industry (Supervision) Act 1993 being amended as part of the reforms? 

FAQ 39: What does 'utilises' mean in the context of group policies? What does APRA expect of RSE licensees with regards to 'challenging' a group policy when they might not have capacity to influence a group-wide policy?

Insurance in Superannuation

FAQ 33: Will RSE licensees be able to offer insurance benefits to members via general insurance (rather than only life insurance) policies? 

Outsourcing

FAQ 12: Do the prudential standards cover only material outsourcing activities? 

FAQ 13: Is an RSE licensee permitted to outsource the risk management function? 

FAQ 31: What is the level of involvement that APRA is seeking in respect of offshoring arrangements? 

FAQ 32: A number of funds have invested in a service provider and have engaged that service provider. If a fund owns a service provider, do they still have to tender to determine that the related party is best? 

FAQ 37: Does the offshoring provision apply only to new contracts entered into? How will existing arrangements be dealt with? 

FAQ 38: Where new services are added by a service provider over time, and these services are conducted overseas, does the RSE licensee need to consult with APRA? 

FAQ 41: If an RSE licensee enters into a contract for the delivery of services, does APRA expect the board to satisfy itself as to the adequacy of all of the systems and processes within that other entity? 

FAQ 42: Where a service provider conducts part of an RSE licensee’s material business activity offshore (i.e. the physical location of this part of its work is outside Australia), will this be considered offshoring for the purposes of Prudential Standard SPS 231 Outsourcing (SPS 231)? 

Governance

FAQ 14: An equal representation board has nominating bodies that select directors. How can such a board have a board renewal policy when it is not in control of board renewal? 

FAQ 24: When would APRA be likely to grant an exemption from the requirement to have an internal audit function? 

FAQ 34: Will APRA require the annual board performance assessment to be conducted by an external independent party? 

FAQ 35: Does the remuneration policy cover the remuneration of non-executive directors? 

FAQ 43: Responsible persons of RSE licensees can be remunerated by a third party rather than the RSE licensee. Does the RSE licensee require a remuneration policy or Board Remuneration Committee in these circumstance? 

FAQ 58: When do the auditor rotation requirements commence? 

Conflicts of Interest

FAQ 15: Can the register of relevant duties and register of relevant interests required by Prudential Standard SPS 521 Conflicts of Interest be combined into one document? 

FAQ 36: Paragraph 5(a) of Prudential Standard SPS 521 Conflicts of Interest defines a relevant duty to be 'any duty owed by the RSE licensee, or a Responsible Person of the licensee, to beneficiaries or any other person'. When is a relevant duty provided to a person other than a beneficiary of the RSE? 

Fit and Proper

FAQ 25: What are APRA’s expectations around identifying responsible persons of service providers? Would responsible persons include the day-to-day contacts, senior managers, the CEO or board of a service provider? 

FAQ 56: In the context of SPS 520, and in particular paragraph 11(f), which relates to persons who perform activities for a connected entity of the RSE, does the term 'connected entity' encompass key outsourced service providers of the RSE licensee, or is it more limited? 

Risk Management 

FAQ 27: What is the definition of a material deviation as opposed to a significant breach in the RSE licensee declarations in Prudential Standard SPS 220 Risk Management (SPS 220)? 

FAQ 28: Prudential Standard SPS 220 Risk Management (SPS 220) focuses on RSE licensees determining their own material risks, however, APRA also issues letters to industry about risks that APRA believes are material. How do these two relate to one another? 

FAQ 29: How can RSE licensees gain further insight on APRA's requirements regarding risk appetite statements prior to Prudential Practice Guides being released? 

FAQ 45: Most of the existing operating standards for RSE licensees have equivalent prudential standards under the new prudential framework. However, there is no specific prudential standard on the adequacy of resources. Will an RSE licensee have to maintain an adequacy of resources policy in order to comply with the prudential standards? 

FAQ 53: What are APRA’s expectations in relation to the risk appetite statement?  

FAQ 60: Does APRA require an RSE licensee to document, within its risk management strategy, its material risk ratings at both inherent and residual levels?  

Operational Risk Financial Requirement 

FAQ 16: What is the operational risk financial requirement (ORFR)? Is it a capital requirement? 

FAQ 17: Does the ORFR cover other risks such as investment risks or downturns in the market? 

FAQ 18: How does the ORFR work for a defined benefit fund? 

FAQ 19: Wind-ups or successor fund transfers: what happens to financial resources held to meet the ORFR? Will APRA have oversight of this? 

FAQ 20: Can the excess assets of a defined benefit fund be used to finance the ORFR?  

FAQ 21: Is the requirement to prepare a transition plan for the ORFR still required if a fund will commence from 1 July 2013 with a fully funded operational risk reserve?  

FAQ 22: Can the ORFR be used to pay for costs like the Trio Levy? 

FAQ 23: FAQ 23: Why does the financial requirement only cover operational risks, whereas capital is held for all risks in the other APRA-regulated industries?  

FAQ 46: APRA has indicated in its April Response to submissions - Prudential standards for superannuation that it would articulate a simple-to-calculate and consistent ORFR target amount in a PPG as a benchmark. What is this amount and on what is it based? 

FAQ 47:Does APRA intend to endorse any particular approach for determining the ORFR target amount? 

FAQ 48: How may the ORFR reflect compensation arrangements such as insurance? Does the possibility of compensation reduce the target amount? 

FAQ 49: How may an RSE licensee reflect different investment structures in its ORFR target amount? 

FAQ 50: How may an RSE licensee reflect different operating models in its ORFR target amount? 

FAQ 51: In the case of some operational risk events, for example, a unit pricing error, can the ORFR be used to cover both the costs of correcting the error and the losses resulting from the error?

FAQ 54: Can the reserve held for the purpose of satisfying the operational risk financial requirement be used to cover the implementation of measures to prevent the recurrence of a similar event, where it can be demonstrated to be in the best interests of members? 

FAQ 62: Can an RSE licensee reduce its ORFR target amount to take into account another APRA financial requirement (relating to operational risk) imposed on an investment vehicle into which an RSE invests?

Defined Benefit Matters

FAQ 52: What is the rationale for the shortfall limit?  

FAQ 57: Is the intention of the shortfall limit to reflect only fluctuations caused by investment returns, or can other factors (for example, the employer's capacity or willingness to pay contributions over the ensuing 12 months) be taken into account? 

MySuper - General

FAQ 4: Is there a limit on the number of MySuper products an RSE licensee can offer?

FAQ 21: Does APRA charge a fee for processing MySuper applications?

FAQ 22: The Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 indicates that there is to be no subsidisation between MySuper products and choice products within a fund. Does this apply to aspects of a fund’s operations, such as marketing or administration costs, or can these be shared across a fund?

 

FAQ 34: Who is eligible for an administration fee discount provided to a particular employer-sponsor?

FAQ 35: When the investment option underlying a proposed MySuper product is a lifecycle investment option, does APRA require additional information in the MySuper authorisation application?

FAQ 37: Does APRA intend to ensure that the name of each authorised MySuper product is unique? If an RSE licensee decides to 'white label' its MySuper product for a large employer, are there any guidelines for the name that should be used in this instance?

FAQ 38: As a white-labelled MySuper offering will not be listed on APRA's list of compliant MySuper products, how will employers know that a white-labelled product is MySuper compliant and authorised by APRA?

FAQ 39: Regarding Item B2.5 in the MySuper application form, does APRA expect that the document will provide details of the methodology for establishing cost recovery across all relevant fees?

FAQ 47: What amendments are required to be made so that, under s. 29TC, the characteristics of a MySuper Product are incorporated in the Governing Rules of the fund?

MySuper - Transition

FAQ 12: Some RSE licensees have been using the ‘MySuper’ name within their businesses prior to the introduction of Stronger Super. What are the implications for future usage?

FAQ 16: Suppose money of a member is invested in an option that was not the default option at the time it was invested, and at that time the member gave an instruction to invest it in the non-default option. Does the member have to give a further instruction, or otherwise confirm the original instruction, in order to avoid the money being treated as an ’accrued default amount’ that has to be moved to a MySuper product?

FAQ 20: Can RSE licensees apply for a MySuper authorisation that involves the rebranding of an existing default investment option?

FAQ 26: Proposed final Prudential Standard SPS 410 MySuper Transition requires an RSE licensee to identify and resolve any impediment to moving members’ accrued default amounts to a suitable MySuper product. Could the duty to act in the best interests of members represent such an impediment?

MySuper - Investment Strategy

FAQ 13: Can different MySuper products within the same fund have different single diversified investment strategies?

FAQ 14: What happens to a member if the pension phase has the same investment strategy as the MySuper option?

 

FAQ 3: When do the eleven prudential standards commence?

A: APRA’s prudential standards will take effect on 1 July 2013, except where an RSE licensee seeks to enter into a new contractual arrangement that falls within the coverage of the new outsourcing, business continuity management,  insurance and remuneration prudential requirements. Prudential Standard SPS 231 Outsourcing, Prudential Standard SPS 232 Business Continuity Management, Prudential Standard SPS 250 Insurance in Superannuation and Prudential Standard SPS 510 Governance were registered on the Federal Register of Legislative Instruments on 22 November 2012, so the transition provisions in these standards commenced on 22 November 2012.
 

 

FAQ 4: What are prudential standards?

A: Prudential standards are determined by APRA and are a form of subordinate legislation. They have the force of law and are registered on the Federal Register of Legislative Instruments. They relate to prudential matters that must be complied with by regulated institutions. Prudential matters for superannuation are defined in Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 and include, among other things, conduct by an RSE licensee in such a way as to:

(a) protect the interests, or meet the reasonable expectations of, the beneficiaries of an RSE;

(b) keep itself in a sound financial position; and

(c) not to cause or promote instability in the Australian financial system.

Prudential matters also encompass conduct by an RSE licensee of any of its affairs that are relevant to the RSE with integrity, prudence and professional skill. Additionally, the definition of prudential matters includes matters relating to the appointment of auditors and actuaries and the conduct of audits and actuarial investigations.

 

FAQ 5: How many prudential standards has APRA issued for superannuation?

A: APRA has issued twelve prudential standards for superannuation. The eleven prudential standards released with Response to submissions – Prudential standards for superannuation on 15 November 2012 and the twelfth standard, proposed final Prudential Standard SPS 410 MySuper Transition, can be accessed here.

 

FAQ 6: What happens if an RSE licensee does not follow APRA’s prudential standards?

A: APRA has the power to direct an RSE licensee to comply with RSE licensee law (which includes prudential standards) where APRA has reasonable grounds to believe that a breach has occurred. A failure to comply with a direction by a specified time may lead to cancellation of the RSE licence and may be an offence. APRA will also have the power to seek an injunction to enforce prudential standards.

 

FAQ 7: Do prudential standards exist for any other industry?

A: Prudential standards exist for authorised deposit-taking institutions, general insurers, life insurers and friendly societies. Superannuation is the only APRA-regulated industry for which prudential standards do not currently exist.

 

FAQ 8: What is the difference between a prudential standard and a prudential practice guide, both of which are issued by APRA?

A: Prudential standards contain prudential requirements that must be complied with by RSE licensees. Prudential practice guides are guidance materials that support the requirements contained in the prudential standards. Prudential practice guides are not enforceable.

 

FAQ 11: Is s. 52 of the Superannuation Industry (Supervision) Act 1993 being amended as part of the reforms?

A: Section 52 is being amended to strengthen trustee covenants and a new s. 52A is also proposed that imposes new duties on directors of RSE licensees. In addition, the new s. 29VN and s. 29VO impose specific obligations on trustees and directors in relation to a MySuper product. The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 contains the amendments to s. 52 and the new s. 52A, s. 29VN and s. 29VO.

FAQ 39: What does 'utilises' mean in the context of group policies? What does APRA expect of RSE licensees with regards to 'challenging' a group policy when they might not have capacity to influence a group-wide policy?
A: Several of the prudential standards propose that an RSE licensee that is part of a corporate group may utilise group policies or functions. The purpose of this provision is to enable an RSE licensee to benefit from adopting policies, procedures and functions that have already been developed and are available within the group, provided that the RSE licensee is satisfied that these policies are appropriate to the RSE licensee’s business operations and meet the requirements of the relevant prudential standard. This provision may be beneficial to an RSE licensee in reducing costs, increasing efficiency and ensuring consistency and effective communication across the group.

Where a group policy is utilised, the RSE licensee should consider the adequacy and appropriateness of the group policy if applied to the individual circumstances of the RSE licensee, and specifically whether or not the group policy conflicts with or adequately covers the business operations of the RSE licensee. Where a group policy does not adequately address matters relevant to the RSE licensee, including compliance with the legislative framework (which includes APRA’s prudential standards), APRA would expect the board of the RSE licensee to respond to any inconsistency or gap in the group policy by creating its own policy or modifying the group policy, rather than entirely adopting the group policy.  

FAQ 33: Will RSE licensees be able to offer insurance benefits to members via general insurance (rather than only life insurance) policies?

A: Yes.

In its Response to submissions - Prudential standards for superannuation issued on 27 April 2012, APRA proposed to restrict insurance benefits offered to members to those acquired from life companies. APRA now proposes not to have such a restriction for income protection insurance and intends to amend Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) to reflect this.

The objective behind APRA’s proposal was to support the offering of insurance benefits which are clearly aligned with the best interests of members. Arrangements also have to comply with the Government’s announced prohibition on self-insurance, except in very limited circumstances relating to defined benefit members.

A key difference between general insurance and life insurance policies, which provide income protection insurance, is that a general insurance policy must have a term of no more than 3 years, whereas the term for a life insurance policy can be for many years. Because of this, a general insurance policy can be cancelled, or have significant changes to the terms and conditions, within 3 years of commencement. In contrast, the terms and conditions of benefits offered by life companies (but not the premiums) are guaranteed to be renewed without change for a longer period – indeed indefinitely for some arrangements. In APRA’s view, the guaranteed renewability of terms and conditions is closely aligned to the best interests of members and should ensure that the risk of self-insurance is minimised.

APRA considers that a principles-based approach can achieve an appropriate outcome. Accordingly, adjustments will be made to the definition of insurance in SPS 250 so that the use of general insurance policies for income protection insurance is not precluded. SPS 250 will also include additional provisions requiring the risks involved in offering insurance through a general insurer, as well as a life insurer, to be considered and addressed by RSE licensees. Further guidance on APRA’s expectations in relation to insurance will also be provided in Prudential Practice Guide SPG 250 Insurance in Superannuation (SPG 250).

 

FAQ 12: Do the prudential standards cover only material outsourcing activities?

A: Requirements in some of the other prudential standards will affect specific types of outsourced arrangements, including outsourcing the risk management function (Prudential Standard SPS 220 Risk Management) and the internal audit function (Prudential Standard SPS 510 Governance), as well as the retention of external providers of investment functions (Prudential Standard SPS 530 Investment Governance). In addition, Prudential Standard SPS 521 Conflicts of Interest will require an RSE licensee to have processes to identify conflicts arising from existing or prospective service providers.



FAQ 13: Is an RSE licensee permitted to outsource the risk management function?
A: Yes, an RSE licensee is permitted to outsource the risk management function. However, the RSE licensee is ultimately responsible for ensuring that its risk management framework appropriately manages the risks to their business operations.
 

FAQ 31: What is the level of involvement that APRA is seeking in respect of offshoring arrangements?

A: The requirements for consultation for offshoring agreements involving a material business activity are that RSE licensees must consult with APRA prior to entering into offshoring agreements. APRA is developing draft guidance to support SPS 231 and expects to release it before the end of 2012.

APRA has issued guidance to the other regulated industries on this issue (Prudential Practice Guide 231 Outsourcing). Relevant content from PPG 231 is set out below.

  • The Prudential Standards require regulated institutions to consult with APRA prior to entering into offshoring agreements. This prior consultation is intended to provide an opportunity for APRA to review the institution’s assessment of offshoring risks, and the processes and controls introduced to mitigate them. This will allow APRA to provide feedback to regulated institutions, but APRA does not intend to approve individual offshoring arrangements.
  • An ‘offshoring’ arrangement can give rise to a number of particular risks, including: country risk; compliance (legal) risk; contractual risk; access risk; and counterparty risk.
  • Typically, these and other risks would be specifically addressed during the preparation of a business case, when conducting due diligence and during contract negotiations. These risks would also be considered when conducting the ongoing monitoring and control of that material business activity. Specific risk management expertise may be required when assessing, monitoring and controlling material business activities outsourced to service providers conducting the activities outside Australia.

 

FAQ 32: A number of funds have invested in a service provider and have engaged that service provider. If a fund owns a service provider, do they still have to tender to determine that the related party is best?
A: APRA expects the RSE licensee to have a process in place to satisfy itself that engaging any service provider (whether or not a related party) is in the best interests of members; that process may include tendering, market testing, benchmarking etc.

FAQ 37: Does the offshoring provision apply only to new contracts entered into? How will existing arrangements be dealt with?
A: The provisions relating to prior consultation on offshoring arrangements apply to new contracts entered into from 22 November 2012.

In respect of existing arrangements, where the anticipated end date of the arrangement is on or after 1 January 2014, RSE licensees must take all reasonable steps to adjust the terms of the arrangement in order to ensure that the RSE licensee complies with the offshoring provision.

FAQ 38: Where new services are added by a service provider over time, and these services are conducted overseas, does the RSE licensee need to consult with APRA?
A: APRA expects a material additional service would typically necessitate an adjustment in the terms and conditions of the original agreement. Where new material services are added to the services already provided by an existing service provider, this will ordinarily represent a new offshoring agreement and will therefore be subject to the prior consultation requirement.

Any plans for offshoring additional services should be discussed as early as practicable with APRA. 
 

FAQ 41: If an RSE licensee enters into a contract for the delivery of services, does APRA expect the board to satisfy itself as to the adequacy of all of the systems and processes within that other entity?

A: APRA proposes that the outsourcing requirements of Prudential Standard SPS 231 Outsourcing will apply to any material business activity that the RSE licensee could undertake itself, regardless of whether the entity is unrelated or part of the same corporate group. The board should be satisfied that the service provider has systems and processes in place to be able to conduct the relevant business activity for the RSE licensee on an ongoing basis.

FAQ 42: Where a service provider conducts part of an RSE licensee’s material business activity offshore (i.e. the physical location of this part of its work is outside Australia), will this be considered offshoring for the purposes of Prudential Standard SPS 231 Outsourcing (SPS 231)?

A: SPS 231 requires RSE licensees to treat these agreements as offshoring. The RSE licensee must therefore engage in prior consultation with APRA before entering into the agreement.

FAQ 14: An equal representation board has nominating bodies that select directors. How can such a board have a board renewal policy when it is not in control of board renewal?
A: The board must determine for itself what it believes is an appropriate renewal policy. Where a board has nominating bodies that select directors, APRA expects that the board would make the nominating bodies aware of APRA’s requirements and of the RSE licensee’s board renewal policy, and engage in a dialogue with the nominating bodies regarding how their nomination process can support the board renewal policy.
 

FAQ 24: When would APRA be likely to grant an exemption from the requirement to have an internal audit function?

A: APRA considers exemptions and adjustments to all prudential requirements based on the specific circumstances of a regulated institution. An RSE licensee that considers that it does not need to maintain the internal audit function as set out in Prudential Standard SPS 510 Governance will need to provide a detailed explanation to APRA for consideration.

 

FAQ 34: Will APRA require the annual board performance assessment to be conducted by an external independent party?

A: As is the case in other APRA-regulated industries, there will be no requirement for the annual board performance assessment to be conducted by an external independent party. APRA expects, however, that there would be some form of periodic external review (e.g. every three years).

 

FAQ 35: Does the remuneration policy cover the remuneration of non-executive directors?

A: Yes. The remuneration policy applies to all responsible persons (as defined in Prudential Standard SPS 520 Fit and Proper), including non-executive directors.

FAQ 43: Responsible persons of RSE licensees can be remunerated by a third party rather than the RSE licensee. Does the RSE licensee require a remuneration policy or Board Remuneration Committee in these circumstances?
A: Yes. The requirements to have a Board Remuneration Committee and a remuneration policy apply to all RSE licensees. Prudential Standard SPS 510 Governance (SPS 510) requires that all responsible persons be covered by the remuneration policy of an RSE licensee. All forms of remuneration are captured by SPS 510 regardless of where, or from whom, the remuneration is sourced.

These requirements therefore apply to responsible persons (including non-executive directors) for their work for the RSE licensee regardless of whether or not they are remunerated by the RSE licensee. The RSE licensee must be familiar enough with third party remuneration arrangements to have comfort that the way the individual responsible person is being remunerated by their employer is aligned broadly with the remuneration approach of the RSE licensee.

FAQ 58: When do the auditor rotation requirements commence?
A: Paragraph 64 of Prudential Standard SPS 510 Governance states that individuals who play a significant role in the audit of an RSE for five successive years, or for more than five years out of seven successive years, cannot continue in that role until a further two years have passed.
Paragraph 64 commences on 1 July 2013. RSE Licensees must ensure audit arrangements in respect of years of income that commence on or after 1 July 2013 comply with this requirement.
If an RSE licensee considers that there are special circumstances that warrant exemption by APRA, they should discuss this with their APRA Responsible Supervisor.


 

FAQ 15: Can the register of relevant duties and register of relevant interests required by Prudential Standard SPS 521 Conflicts of Interest be combined into one document?

A: Yes, they can be maintained in a single document. However, there will still need to be a clear distinction between what is a duty and what is an interest, because of the potentially different treatment of conflicts arising from duties and interests that will have to be documented in the conflicts management policy.

 

FAQ 36: Paragraph 5(a) of Prudential Standard SPS 521 Conflicts of Interest defines a relevant duty to be 'any duty owed by the RSE licensee, or a Responsible Person of the licensee, to beneficiaries or any other person'. When is a relevant duty provided to a person other than a beneficiary of the RSE?

A: The words 'any other person' are intended to be read broadly to ensure that all other duties that the RSE licensee or its directors might owe to other individuals and entities are captured. For example, an RSE licensee that is also a responsible entity will have duties to the investors in their managed investment schemes. A director might, for example, be employed by another company or sit on another board, and so owe duties to those companies and shareholders as appropriate.

Note that these are examples only and are not meant to limit the obligation on the RSE licensee to identify all other possible duties.

 

FAQ 25: What are APRA’s expectations around identifying responsible persons of service providers? Would responsible persons include the day-to-day contacts, senior managers, the CEO or board of a service provider?

A: An RSE licensee will be required under Prudential Standard SPS 520 Fit and Proper to identify all responsible persons whether they are employed by the RSE licensee or not. In relation to service providers, the requirements of the standard are focused on identifying those individuals within the service provider organisation who are the responsible persons in relation to the RSE licensee. This will often require an assessment of their functions, the kinds of decisions they make and the impact they may have on the business operations of the RSE licensee. This will differ depending on the type of entity and the type of function that it performs for the RSE licensee.

FAQ 56: In the context of SPS 520, and in particular paragraph 11(f), which relates to persons who perform activities for a connected entity of the RSE, does the term 'connected entity' encompass key outsourced service providers of the RSE licensee, or is it more limited?
A: 'Connected entity' is a term that has a legislative definition – section 10(1) of the SIS Act defines a connected entity as a subsidiary of the RSE licensee or an entity defined in the regulations. No regulations for this purpose have been prescribed.

At this stage, only wholly-owned subsidiaries of an RSE licensee will be connected entities for the purposes of defining the application of certain provisions in the standards. Note that even though APRA has power to make prudential standards applying directly to connected entities, the prudential standards finalised to date apply to RSE licensees only.

An outsourced service provider would only be a connected entity if it was a wholly-owned subsidiary of the RSE licensee.

FAQ 27: What is the definition of a material deviation as opposed to a significant breach in the RSE licensee declarations in Prudential Standard SPS 220 Risk Management (SPS 220)?
A: A material deviation is a movement out of the ordinary, but not necessarily a breach. If the board is concerned about a movement, but it has not breached the requirements, SPS 220 requires such material deviations to also be reported.

FAQ 28: Prudential Standard SPS 220 Risk Management (SPS 220) focuses on RSE licensees determining their own material risks, however, APRA also issues letters to industry about risks that APRA believes are material. How do these two relate to one another?

A: SPS 220 contains the risk management requirements that RSE licensees must follow. APRA will continue to issue letters to industry regarding key and emerging risks that it has concerns about. Letters to industry do not necessarily contain mandatory requirements.

 

FAQ 29: How can RSE licensees gain further insight on APRA's requirements regarding risk appetite statements prior to Prudential Practice Guides being released?

A: RSE licensees may gain further insight into APRA’s guidance on risk appetite statements by reading the speech that Ian Laughlin gave to the FSC Life Insurance Conference last April. In particular, pages 12 to 15 of this speech discuss APRA’s views on what supervisors will look for in risk appetite statements. Many of these principles are generic and apply equally to the superannuation industry, and are expected to be set out in the superannuation guidance.

 

FAQ 45: Most of the existing operating standards for RSE licensees have equivalent prudential standards under the new prudential framework. However, there is no specific prudential standard on the adequacy of resources. Will an RSE licensee have to maintain an adequacy of resources policy in order to comply with the prudential standards?

A: The adequacy of resources requirements are incorporated in Prudential Standard SPS 220 Risk Management (SPS 220). SPS 220 does not include a specific requirement to maintain an adequacy of resources policy, but paragraph 37 does require an RSE licensee to be able to demonstrate that it has a process to determine the levels of resources that are adequate. Guidance on the adequacy of resources is expected to be addressed in the second stage of PPGs, which are expected to be released for consultation early in 2013.

FAQ 53: What are APRA’s expectations in relation to the risk appetite statement?
A: The risk appetite statement is an important component of an RSE licensee’s risk management framework. An RSE licensee should clearly document in its risk appetite statement meaningful (and where possible measurable) articulation of how much risk it is willing to accept in key areas . The risk appetite statement must also include specific risk tolerances for each material risk.

APRA expects the board of an RSE licensee to engage in the development, and be able to demonstrate ownership, of the risk appetite statement. This is regardless of whether any other party (e.g. an outsourced service provider or a board sub-committee or senior management) has played a significant role in its development. When submitting a MySuper application, APRA would expect an RSE licensee to be prepared to demonstrate, if asked, the steps that the board has taken to actively review, consider, amend (if appropriate) and ultimately approve the risk appetite statement. 

 

FAQ 60: Does APRA require an RSE licensee to document, within its risk management strategy, its material risk ratings at both inherent and residual levels?
A: No. The risk management strategy must include, as a minimum, a description of each material risk to the RSE licensee’s business operations and the approach to managing these risks. An RSE licensee must also maintain a risk appetite statement. The risk appetite statement must articulate the degree of risk that the RSE licensee is prepared to accept to pursue strategic objectives and maximum risk tolerances for each material risk. The articulation of risk appetite is a series of high-level, forward-looking, strategic statements about how much risk is acceptable to the RSE licensee and appropriate for beneficiaries. Risk tolerances implement such strategic statements through risk limits based on the maximum acceptable risk, after taking into account controls to reduce the risk.
 

FAQ 16: What is the operational risk financial requirement (ORFR)? Is it a capital requirement?

A: The ORFR requires an RSE licensee to determine an amount of financial resources to address the operational risks of its business operations; this is a financial requirement. The financial resources can be held in the form of trustee capital or as an operational risk reserve within an RSE, or a combination of both.

 

FAQ 17: Does the ORFR cover other risks such as investment risks or downturns in the market?

A: No, the financial resources held to meet the ORFR can only be used to address a loss arising from an operational risk.

 

FAQ 18: How does the ORFR work for a defined benefit fund?

A: Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114) applies to both defined benefit and accumulation funds. This is because operational risk losses have the potential to affect both defined benefit and accumulation funds and, in the event of a loss, an employer is not obliged to provide funding to address the loss in a wind-up scenario beyond the agreed levels of contributions.

An ORFR will provide the RSE licensee of a defined benefit fund with a prudent buffer that acts to address losses and reduce the risk of the need to reduce member benefits. SPS 114 is designed to be sufficiently flexible to enable sub-funds to hold separate reserves, or ensure that their share of a common reserve or capital is separately identifiable in relation to future funding needs for the ORFR.

Particularly for defined benefit funds, APRA understands that an employer that is both willing and financially able to support a fund could be viewed by an RSE licensee as a mitigant for operational risk losses. However, APRA is of the view that the employer covenant is not generally sufficient, as an employer with a strong covenant typically has no legal obligation to fund any operational loss. Among other things, the enforceability of an employer covenant would need to be considered by an RSE licensee. APRA proposes to clarify this in guidance.

 

FAQ 19: Wind-ups or successor fund transfers: what happens to financial resources held to meet the ORFR? Will APRA have oversight of this?

A: An RSE licensee’s ORFR strategy must detail its process for managing the financial resources held to meet the ORFR in the event that the RSE licensee is wound up. The RSE licensee must also monitor and document its process for ensuring the ORFR remains at an appropriate level in the event of changes to the size, business mix and complexity of its business operations and the wind up of an RSE. The review by APRA of an RSE licensee’s compliance with these requirements will ensure that supervisors have visibility of, and the ability to challenge, the proposed approaches before they are implemented.

Section 52 of the Superannuation Industry (Supervision) Act 1993 will also include overriding trustee covenants that trustees must follow. These include covenants to act fairly in dealing with classes of beneficiaries within the entity and also in dealing with beneficiaries within a class.

 

FAQ 20: Can the excess assets of a defined benefit fund be used to finance the ORFR?
A: APRA’s prudential standards do not prevent the excess assets of a defined benefit fund from being used to finance the ORFR. However, any decision to use excess assets to finance the ORFR would be subject to the legislative trustee obligations, including the duty to exercise the trustee’s powers in the best interests of the beneficiaries.

 

FAQ 21: Is the requirement to prepare a transition plan for the ORFR still required if a fund will commence from 1 July 2013 with a fully funded operational risk reserve?
A: In such a scenario, APRA will not require a transition plan provided that it is satisfied that the ORFR target amount is appropriate and APRA receives notification that the target amount has been met.

 

FAQ 22: Can the ORFR be used to pay for costs like the Trio Levy?
A: The ORFR cannot be called on to pay for government imposed levies. The ORFR can only be used for operational risk losses to members of the fund.

 

FAQ 23: Why does the financial requirement only cover operational risks, whereas capital is held for all risks in the other APRA-regulated industries?
A: As market, investment and credit risks are all borne by individual accumulation members, not the fund as a whole, an RSE licensee is not required to hold financial resources for these types of risks.

Note, however, that for a defined benefit fund, the funding and solvency requirements in Prudential Standard SPS 160 Defined Benefit Matters and in Part 9 of the Superannuation Industry (Supervision) Regulations 1994 are applicable.
 

FAQ 46: APRA has indicated in its April Response to submissions - Prudential standards for superannuation that it would articulate a simple-to-calculate and consistent ORFR target amount in a PPG as a benchmark. What is this amount and on what is it based?

A: APRA expects a soundly-run RSE licensee that has implemented an effective risk management framework to have an ORFR target amount of at least 0.25 per cent of funds under management. This target amount was communicated in APRA’s Response to Submissions - Prudential standards for superannuation on 27 April 2012 and will be included in the guidance to support SPS 114.

APRA expects that an RSE licensee will consider circumstances when more than this amount may be appropriate and envisages it is unlikely that there will be many circumstances where less than this guideline amount would be appropriate.

 

FAQ 47: Does APRA intend to endorse any particular approach for determining the ORFR target amount?

A: APRA will not endorse any particular approach for determining the ORFR target amount. APRA expects that the majority of RSE licensees will determine their ORFR target amount based on a fairly straightforward approach, and does not consider that many RSE licensees will be in a position to be able to adopt a sophisticated approach to determining an appropriate ORFR target amount at this stage.

 

FAQ 48: How may the ORFR reflect compensation arrangements such as insurance? Does the possibility of compensation reduce the target amount?

A: An RSE licensee may enter into arrangements that could provide them with a compensation payment to address the cost of an operational risk event. Such arrangements may include insurance policies, access to financial resources under an enforceable agreement or undertaking, or guarantees.

APRA’s view is that compensation arrangements play an important role in replenishing the financial resources held to meet the ORFR target amount after it has been used. However, such arrangements do not reduce the probability of operational risk events and there is likely to be a level of uncertainty as to the timing, coverage and availability of compensation payments. Accordingly, APRA’s view is that compensation arrangements should not be taken into account in determining) the ORFR target amount but can reduce the prospect that members bear the cost of replenishing the ORFR target amount.

 

FAQ 49: How may an RSE licensee reflect different investment structures in its ORFR target amount?

A: In some scenarios, the assets of an RSE licensee’s business operations may be fully invested in assets of another related APRA regulated entity (e.g. a PST or a life insurance policy) that is also covered by an ORFR target amount or other regulatory financial requirement.

An RSE licensee may consider the impact of any duplication of financial requirements with the other related APRA-regulated entity when determining their ORFR target amount. However, APRA’s view is that the two APRA-regulated entities involved in such an arrangement are unlikely to share all of the same systems, processes and personnel, and hence there are likely to be differences in the operational risk profiles between the two regulated entities. Furthermore, there will inevitably be additional operational risks as a result of the transactions between the two entities. The RSE licensee may therefore determine an offset that is less than the full target amount.

 

FAQ 50: How may an RSE licensee reflect different operating models in its ORFR target amount?

A: Outsourcing an activity such as administration generally results in changes to the operational risk profile of the RSE licensee. APRA considers that the transfer of risks to a service provider may be lead to new risks due to the changes in operations and the level of direct oversight and loss of control as a result of the third-party relationship.

APRA expects it will be difficult for an RSE licensee to be able to demonstrate that it can confidently rely upon the service provider to directly address the cost of any operational risk events. For example, an RSE licensee would be expected to consider matters such as the coverage of the outsourcing agreement and the financial capability of the service provider in different scenarios. As such, there will be limited capacity for reductions to the guideline amount when an RSE licensee considers its operating model.

FAQ 51: In the case of some operational risk events, for example, a unit pricing error, can the ORFR be used to cover both the costs of correcting the error and the losses resulting from the error?

A: No, the ORFR cannot be used to cover the costs of correction of the cause of an operational risk event. The ORFR is intended to be used to compensate beneficiaries for the direct financial losses due to the event.

FAQ 54: Can the reserve held for the purpose of satisfying the operational risk financial requirement be used to cover the implementation of measures to prevent the recurrence of a similar event, where it can be demonstrated to be in the best interests of members?
A: The financial resources held to meet the ORFR target amount may not be used to correct the cause of an operational risk event or fund preventative measures to reduce the risk of a recurrence of the event.

 

FAQ 62: Can an RSE licensee reduce its ORFR target amount to take into account another APRA financial requirement (relating to operational risk) imposed on an investment vehicle into which an RSE invests?

A: The assets of an RSE (‘the investing RSE’) may be invested in another entity that is subject to SPS 114 or another APRA financial requirement relating to operational risk. This may be another entity within the RSE licensee’s business operations (e.g. a pooled superannuation trust) or another entity outside the RSE licensee’s business operations.

An RSE licensee may determine that the investing RSE’s investment in another entity reduces the RSE licensee’s ORFR target amount. This may occur where the RSE licensee establishes that the other APRA financial requirement will directly address certain operational risks that would otherwise be addressed by the RSE licensee’s ORFR target amount in respect of the investing RSE. In order for an RSE licensee to decide such a reduction is appropriate, APRA would expect an RSE licensee to be able to demonstrate that it has:

a) undertaken appropriate analysis of the coverage and availability of the other entity’s APRA financial requirement for the purpose of any operational risks that would otherwise be covered by the RSE licensee’s ORFR target amount in respect of the investing RSE;

b) a thorough understanding of the other entity’s risk management framework such that it is satisfied that the framework appropriately addresses the operational risks that would otherwise be addressed by the RSE licensee’s ORFR target amount in respect of the investing RSE; and

c) determined, via assessment, that the other entity adequately manages its operational risks.

APRA considers that typically, an RSE licensee would only be able to demonstrate the above when the other entity is within an RSE licensee’s business operations, or is closely related to the RSE licensee.

Where the impact of another APRA financial requirement on an RSE licensee’s ORFR target amount in respect of the investing RSE is substantial, an RSE licensee would describe this in its ORFR Strategy. In addition, the RSE licensee would ordinarily ensure that amongst other things:

a) both entities have aligned risk management frameworks for the management of operational risk;

b) the RSE licensee has the ability to influence the other entity’s approach to the management of operational risk; and

c) the other entity maintains an appropriate amount of unrestricted financial resources for operational risks that would otherwise be addressed by the RSE licensee’s ORFR target amount in respect of the investing RSE.

APRA’s view is that there will inevitably be additional operational risks as a result of the transactions between the two entities. This is regardless of the strength of the relationship between the two entities, the level of oversight that the RSE licensee has over the other entity and the level of assurance provided by the other entity. Further, not all of the operational risks of an investing RSE are likely to be able to be addressed by the APRA financial requirement of another entity.

Where an RSE is invested in another entity outside of the RSE licensee’s business operations that is subject to another APRA financial requirement relating to operational risk, and the RSE licensee considers that a reduction in the ORFR target amount is appropriate, APRA expects the ORFR target amount would be equivalent to at least 0.10 per cent of FUM for the investing RSE.

APRA expects that if an RSE licensee seeks to rely, in part, on the APRA financial requirement of an entity that is outside of the RSE licensee’s business operations, the RSE licensee would formalise this arrangement through a clear and enforceable contractual agreement. The RSE licensee would also establish information sharing protocols and notification requirements to enable it to monitor the continuing appropriateness of its reliance on the other APRA financial requirement.

Where an RSE is invested in another entity within an RSE licensee’s business operations e.g. the RSE invests in a PST offered by the RSE licensee, the RSE licensee may reflect the reduced target amount in either the investing RSE or the investee based on each entity’s operational risk profile. For example, the ORFR target amount may be based on at least 0.25 per cent of FUM in relation to the assets of the investing RSE and at least 0.10 per cent of FUM based on the assets of the PST related to that RSE, or vice versa.

 

FAQ 52: What is the rationale for the shortfall limit?
A: APRA recognises that normal market volatility may result in a fund being temporarily placed in an unsatisfactory financial position as the market value of fund assets falls below the level needed to cover vested benefits. The board of an RSE licensee must set a shortfall limit below full coverage of vested benefits to allow for limited and temporary fluctuations (less than one year) in the market value of fund assets. The shortfall limit is designed to provide some flexibility for RSE licensees in managing vested benefit coverage between regular investigations and to avoid having to take additional and perhaps unnecessary investigative and remedial action. A fall in the value of assets that reduces the coverage of vested benefits below the shortfall limit would trigger remedial action, in the form of a restoration plan.

The shortfall limit may be nil (or even negative, that is, a buffer above full coverage of vested benefits may be maintained) if deemed appropriate by the RSE licensee but must not be set at such a level that the fund may become technically insolvent before breaching the shortfall limit.

 

FAQ 57: Is the intention of the shortfall limit to reflect only fluctuations caused by investment returns, or can other factors (for example, the employer's capacity or willingness to pay contributions over the ensuing 12 months) be taken into account?
A: The purpose of the shortfall limit is to avoid the need for immediate action to restore the fund to a satisfactory financial position, when it may reasonably be expected that the market value of fund assets will recover sufficiently in the short term for the fund to return to a satisfactory financial position. Factors such as an employer’s willingness to pay contributions must be dealt with in the triennial funding recommendations of the actuary or the restoration plan, whichever applies.

FAQ 4: Is there a limit on the number of MySuper products an RSE licensee can offer?
A: An RSE licensee can offer only one MySuper product per Registrable Superannuation Entity (fund) unless the additional MySuper products satisfy either the material goodwill provision (s. 29TA) or the large employer provision (s. 29TB) contained in the Superannuation Industry (Supervision) Act 1993. There is no legislative limit on the number of MySuper products, to which these exceptions apply, per fund. The RSE licensee will have to meet all requirements for each MySuper product they offer from a fund.
 
FAQ 21: Does APRA charge a fee for processing MySuper applications?
A: No. APRA does not charge a fee for processing MySuper applications.
 
FAQ 22: The Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 indicates that there is to be no subsidisation between MySuper products and choice products within a fund. Does this apply to aspects of a fund’s operations, such as marketing or administration costs, or can these be shared across a fund?
A: There can be no subsidisation between choice and MySuper products. However, there can be shared costs across a fund. Shared costs must be distributed fairly and reasonably between members holding different classes of beneficial interest in the fund (see s 99E of the Superannuation Industry (Supervision) Act 1993.
 

 

FAQ 25: RSE licensees often charge a fixed dollar administration fee as well as a percentage fee to all members. The percentage fee is capped by some RSE licensees at certain balances. Is this practice permitted for a MySuper product?
A: The charging rules in relation to administration fees set out in the Superannuation Industry (Supervision) Act 1993 for MySuper permit RSE licensees to continue to charge a combination of a flat fee and percentage fee, provided that all members of a fund who hold a particular MySuper product are charged the same flat fee and the same percentage of their account balance. The relevant amendments to the SIS Act do not provide for the capping of the percentage fee component at certain balances within members accounts.

FAQ 34: Who is eligible for an administration fee discount provided to a particular employer-sponsor?
A: The Superannuation Industry (Supervisions) Act 1993 permits administration fee discounts to be extended to employees of an employer-sponsor or an associate of the employer-sponsor (and any relatives and dependants of those employees if the employer-sponsor is also making contributions for their benefit), provided certain requirements are met (see ss. 29VA(8) and 29VB of the Superannuation Industry (Supervisions) Act 1993. This enables the RSE licensee to take into account administration arrangements that lower the cost of the RSE in dealing with certain employer-sponsors. However, the same discount cannot be extended to members who are relatives and dependents of employees of that particular employer if the employer is not making contributions for the benefit of those relatives or dependents.
 
FAQ 35: When the investment option underlying a proposed MySuper product is a lifecycle investment option, does APRA require additional information in the MySuper authorisation application?
A: As a lifecycle option will involve different asset allocations for specified life stages, a lifecycle investment strategy would be expected to include information on each stage within the strategy. APRA would expect an RSE licensee's investment objectives and investment strategy to specifically document how it has determined the various stages within a lifecycle strategy, the investment objectives for each stage and any specific risks to be identified and managed. In addition, an RSE licensee must set out the proposed investment fee structure (for up to four age cohorts) of the lifecycle option in the MySuper authorisation application form.
 


FAQ 37: Does APRA intend to ensure that the name of each authorised MySuper product is unique? If an RSE licensee decides to 'white label' its MySuper product for a large employer, are there any guidelines for the name that should be used in this instance?

A: No. Each authorised MySuper product will be given a unique numeric identifier by APRA. Disclosure requirements, intellectual property rights, trademarks and competition issues will remain with their normal regulators. There is no naming convention that must be used in regards to white labelled products.
FAQ 38: As a white-labelled MySuper offering will not be listed on APRA's list of compliant MySuper products, how will employers know that a white-labelled product is MySuper compliant and authorised by APRA?
A: Each authorised MySuper product will be given a unique identifier by APRA. White labelling is a device often used by an RSE licensee in marketing to an employer and members sponsored by that employer. Each white-labelled version of the product will need to identify itself as being (a version of) the authorised product and would be expected to use the unique APRA identifier. The detail of product identification is a matter for ASIC.
 
FAQ 39: Regarding Item B2.5 in the MySuper application form, does APRA expect that the document will provide details of the methodology for establishing cost recovery across all relevant fees?

A: Yes. While APRA will not prescribe a particular methodology, APRA will assess the reasonableness of the RSE licensee’s approach.
 
FAQ 47: What amendments are required to be made so that, under s. 29TC, the characteristics of a MySuper Product are incorporated in the Governing Rules of the fund?

A: The Governing Rules of a fund are generally made up of its Trust Deed and any other documents approved by the board which are binding on the operation of the fund. Under s. 29TC of the SIS Act, the Governing Rules of the fund must set out the characteristics of each MySuper product.

At question A5 of the MySuper authorisation application form, the applicant must attach an up-to-date copy of the Trust Deed and Governing Rules of the RSE.

APRA’s view is that the appropriate document to refer to the MySuper characteristics is the Trust Deed. If the characteristics are not incorporated in the Trust Deed then APRA expects that the Trust Deed will contain a reference to those other documents which form part of the Governing Rules and state which one, and at what section, that document contains reference to the MySuper characteristics as required by s. 29TC(1).

A number of Trust Deeds that APRA has sighted as part of assessing MySuper applications contain general statements to the effect that where the Trust Deed contains a statement inconsistent with the governing law, the terms of the governing law will apply. This does not satisfy s. 29TC where the Governing Rules are silent as to the characteristics set out in s. 29TC.

APRA further considers that a statement to the effect that all the requirements in the governing law are incorporated in the Trust Deed is also inadequate given the specific nature of the characteristics listed in s. 29TC. In APRA’s view, it is clearly intended that each characteristic be replicated in the Governing Rules of the fund.

FAQ 12: Some RSE licensees have been using the ‘MySuper’ name within their businesses prior to the introduction of Stronger Super. What are the implications for future usage?
 
A: As one of the key points of Stronger Super is improved comparability of MySuper products, APRA expects many RSE licensees will seek to include the word MySuper in the product name. However, this is not a requirement.

If an RSE licensee uses the term ‘MySuper’ prior to the implementation of the reforms (and authorisation of a MySuper product by APRA), the RSE licensee would need to be certain it is not engaging in misleading and deceptive conduct or breaching another law relating to disclosure. In addition, from the date of proclamation, section 29W of the  Superannuation Industry (Supervision) Act 1993 will make it an offence to represent that a product is a MySuper product if the product has not been authorised.
 
FAQ 16: Suppose money of a member is invested in an option that was not the default option at the time it was invested, and at that time the member gave an instruction to invest it in the non-default option. Does the member have to give a further instruction, or otherwise confirm the original instruction, in order to avoid the money being treated as an ’accrued default amount’ that has to be moved to a MySuper product?

A: Nothing in the Stronger Super legislation requires a member who has already given an investment instruction to the RSE licensee to take any action whatsoever. Their instructions regarding investment choice remain binding, including where they were given to the RSE licensee of the member’s former fund which has undergone a successor fund transfer into the current fund.

FAQ 20: Can RSE licensees apply for a MySuper authorisation that involves the rebranding of an existing default investment option?

A: Yes. RSE licensees can apply for a MySuper authorisation that involves the rebranding of an existing default investment option. The RSE licensee will need to make sure that the current default option meets all of the criteria for a MySuper product.


FAQ 26: Proposed final Prudential Standard SPS 410 MySuper Transition requires an RSE licensee to identify and resolve any impediment to moving members’ accrued default amounts to a suitable MySuper product. Could the duty to act in the best interests of members represent such an impediment?

A: APRA recognises that, in some cases, it may be in the members’ best interests to delay moving accrued default amounts to a suitable MySuper product. For example, there may be difficulties in arranging transition of insurance. In these cases, APRA would expect the RSE licensee to clearly identify and document why it is in the members’ best interests to delay the transition and when and how they intend to move the members’ accrued default amount to a suitable MySuper product.
 
FAQ 13: Can different MySuper products within the same fund have different single diversified investment strategies?

A: Yes, MySuper products within the same fund can have different single diversified investment strategies.


FAQ 14: What happens to a member if the pension phase has the same investment strategy as the MySuper option?

A: There can be no pension offered or paid from a MySuper product and so the member would need to be moved out of the MySuper option. However, there is no legislative or regulatory barrier to a pension product having the same underlying investment strategy as a MySuper product.
 
Other superseded guidance ( 7 November 2013)(Date of Last Update: 7 November 2013)