The FAQs on this page refer to provisions of APRA’s prudential standards for superannuation and proposed legislative amendments which have not yet become law. Accordingly, the views and draft provisions set out in these FAQs are subject to change. The FAQs may also include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.
Note: the numbering of these questions is fixed and will not change as new questions are added.
APRA has archived a number of FAQs which contain matters that are covered in the final prudential standards (released in November 2012) or in the draft prudential practice guides (released in December 2012).
Updated: 19 June 2013
FAQ 3: When do the eleven prudential standards commence?
FAQ 10: What are APRA's expectations in respect to potential transitional exemptions from prudential standards? Does APRA expect that there will be a number of RSE licensees applying for transitional exemptions from particular aspects of the prudential standards?
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?
FAQ 13: Is an RSE licensee permitted to outsource the risk management function?
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 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)?
FAQ 30: What is APRA’s view on the distinction between the work of the internal auditor versus the work of the external auditor?
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 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?
FAQ 58: When do the auditor rotation requirements commence?
FAQ 44: Can the conflicts management policy required by Prudential Standard SPS 521 Conflicts of Interest (SPS 521) jointly address the requirements of SPS 521 and ASIC Regulatory Guide 181 (RG 181) if the RSE licensee also holds an Australian Financial Service Licence?
FAQ 26: What are APRA’s expectations on the requirement to assess the fitness and propriety of responsible persons from material outsourced service providers, including whether there can be a reduced assessment process where the service provider is a prudentially regulated entity?
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?
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: Why does the financial requirement only cover operational risks, whereas capital is held for all risks in the other APRA-regulated industries?
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 55: If an RSE licensee decides to pass the cost of establishing a reserve for the purposes of the ORFR to members, would this constitute a fee? If so, how is this applied to MySuper members? Must it be charged as an administration fee?
FAQ 59: What are APRA’s expectations in relation to the ORFR for RSE licensees of unfunded defined benefit (DB) funds?
FAQ 61: Do I need to comply with the existing conditions on my RSE licence relating to capital once the prudential standard on ORFR takes effect on 1 July 2013? NEW
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? NEW
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 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?
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?
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.
A: APRA expects that all RSE licensees will be in a position to comply with the new requirements from 1 July 2013. However, APRA recognises that in some instances an RSE licensee may be working towards compliance, but may not have been able to fully comply for good reasons. In such instances, RSE licensees will need to apply to APRA for a transitional exemption and APRA will determine whether a transitional exemption is warranted.
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.
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.
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.
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.
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.
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.
A: The external auditor has a specific role and duties that it must perform, such as the completion of the annual audit report. This report must include statements of the auditor’s opinion on matters including compliance with prudential requirements and compliance with the risk management framework (which includes the risk management declaration).
One of the roles of the internal auditor is to provide the board and the Board Audit Committee with further independent assurance that the risk management framework and the operational risk financial requirement are appropriate, consistently implemented and effective. This is a broader, less prescribed role with an enhanced focus on matters such as the adequacy and effectiveness of approaches.
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.
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.
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.
A: One conflicts management policy could address the requirements of SPS 521 and RG 181. APRA would expect the RSE Licensee to appropriately address in such a single policy any differences in the provisions and scope of SPS 521 and RG 181 so that all the requirements of SPS 521 are also met.
A: APRA expects RSE licensees to take a reasonable approach to assessing the fitness and propriety of responsible persons that are employed by a service provider; the obligation is on an RSE licensee to satisfy itself that all of the responsible persons relevant to their business operations have been assessed as fit and proper.
The practical extent of a fit and proper assessment for a responsible person employed by a service provider will depend on the comfort that the RSE licensee has about the assessment/recruitment processes the service provider has in place. If the RSE licensee has any doubts about the rigour of the service provider’s processes to ensure that their staff are fit and proper, the RSE licensee would be expected to undertake a more direct assessment. If the external entity undertakes police checks, however, the RSE licensee is entitled to rely on those police checks.
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.
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.
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.
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.
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.
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.
A: If the RSE licensee decides to fund the ORFR through charges to member accounts, then APRA would expect this to be reflected in administration fees.
A: SPS 114 applies to all RSE licensees for the purpose of paragraph 52(8)(b) of the SIS Act. SPS 114 requires each RSE licensee to determine and maintain an appropriate ORFR target amount of financial resources that reflects the operational risks of the RSE licensee’s business operations. APRA recognises that in some circumstances, an RSE that has unfunded DB liabilities may have entered into a government funding arrangement that limits the RSE’s direct exposure to operational risks relating to those DB liabilities. The funding arrangement may be a relevant consideration for the RSE licensee, which may result in a lower ORFR target amount than for other types of DB funds.
A: Yes, unless you already meet your ORFR target amount on 1 July 2013.
RSE licensees that hold their ORFR target amount as at 1 July 2013 will not be required to comply with the capital conditions on their licences after 1 July 2013. Those RSE licensees must notify APRA within 10 business days after 1 July 2013 that their ORFR target amount was met on 1 July 2013.
If RSE licensees are relying on the transitional arrangements in SPS 114 to build up their ORFR target amount, APRA confirms that those transitional arrangements end once their nominated ORFR target amount has been met for the first time. The RSE licensee must notify APRA within 10 business days when the ORFR target amount is met for the first time. The RSE licensee will not be required to comply with the capital conditions on its licence once the ORFR target amount is met.
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.
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.
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.
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.
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.
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.
Note: These FAQs are published for discussion purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances. Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs.