APRA consults on strengthening SFT regulation

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By Mark Bland, Partner, Geoffrey McCarthy, Special Counsel and Vijay Adithya, Lawyer

The forces behind the recent wave of fund mergers and successor fund transfers (SFTs) have been the execution by trustees of inorganic growth strategies coupled with varying degrees of regulatory intervention following the introduction of the annual performance test and MySuper Heatmap.

Australian Prudential Regulation Authority (APRA) is clearly not satisfied and reports that it has observed poor outcomes for members as a result of superannuation trustees not planning or executing transfers in a prudent and timely manner. As a result of this, it has commenced a consultation on measures to enhance transfer planning by superannuation trustees.

On August 2022, APRA released a discussion paper on strategic planning and member outcomes, with proposed enhancements to Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515).

On 10 November 2022, APRA released a discussion paper specifically focused on superannuation transfer planning and commenced consultation on the proposals within the paper. The discussion paper includes proposals to introduce new requirements relating to transfer planning and to update the existing prudential framework. The paper reiterates APRA’s position that member outcomes are improved through mergers that deliver the benefits of scale or by transferring members to a better performing fund.

Overview of APRA’s consultation on transfer planning

APRA’s discussion paper states how a lack of robust transfer planning puts members at risk of a protracted, costly or failed transfer that does not improve member outcomes. APRA states that in recent SFTs it has observed:

  • poor project management, unclear accountabilities and inefficient and conflicted governance structures;
  • that RSE licensees “struggled to balance the need for compliance with complex legal obligations with a pragmatic approach pointed at the orderly completion of a transfer”; and
  • RSE licensees unable to secure the additional resources to maintain BAU while undertaking a transfer and to manage the associated risks.

Its proposals to enhance transfer planning identifies and addresses three phases of a transfer of members:

  • planning;
  • pre-position and decision making; and
  • execution.

APRA proposes to introduce new requirements relating to transfer planning in Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515) new requirements in relation to the transfers and cancellations of MySuper products and update Prudential Practice Guide SPG 227 Successor Fund Transfers and Wind-ups (SPG 227).

Planning

“RSE licensees must be well prepared, ahead of time, to take prompt actions, including a transfer of members, to promote the financial interests of beneficiaries”

Currently, RSE licensees are required under SPS 515 to review performance in achieving strategic objectives and use the results to make improvements to their business operations on an annual basis. Guidance on planning is also provided in SPG 515 and SPG 516 Business Performance Review (SPG 516).

Specifically, in relation to SFTs, SPG 227 currently guides RSE licensees to document the basis for a transfer decision, including why this is considered to be in the best interests of beneficiaries. Guidance is also provided on legal obligations, including ‘equivalent rights’, reasons for undertaking SFTs and wind-up of an RSE.

APRA proposes to elevate the guidance in SPG 515 to the status of legal requirements in SPS 515. APRA proposes a legal requirement that an RSE licensee is able to demonstrate that it regularly considers, and where necessary plans for, future circumstances that may necessitate a transfer of all or some members. SPG 515 is also expected to be updated to reflect this requirement, with guidance on what a prudent approach to planning would include.

APRA also proposes to require RSE licensees to have in place triggers for escalation steps in preparedness to undertake a complete or partial transfer of members.

APRA considers that all RSE licensees must be able to demonstrate that they undertake “credible planning to deal with circumstances that may necessitate a transfer of members”.

Pre-positioning and decision making

“RSE licensees must act promptly to respond to triggers, and undertake an objective and thorough analysis of transfer options, to determine the best outcome for members”

APRA sees “pre-positioning” as a solution to transfers failing late in the process due to matters that should have been identified as unresolvable far earlier in the process.

APRA does not identify any existing requirements on pre-position and decision making in the prudential framework. Guidance can be found in SPG 227, SPG 515 and SPG 516. APRA’s guidance relates to the development of contingency plans and the consideration of whether a transfer would be in the best interest of members. Guidance is also available on implementing a timely exit strategy where RSE licensees decide to wind-up or transfer members.

APRA observes that RSE licensee “can struggle to take prompt and proportionate action to respond to poor performance outcomes.”

The proposed enhancements include introducing a new requirement under SPS 515, which would require RSE licensees to have a trigger framework to identify and escalate the potential need for remedial action to address. APRA also proposes to update the guidance in SPG 515 by outlining the preparatory steps that a licensee can take when the need for a potential transfer becomes more pressing. This includes undertaking due diligence, identifying legislative, operational, cultural and practical barriers and the development of a business case for the transfer.

APRA also proposes to introduce the requirements that must be met in relation to the transfer of assets where a MySuper authorisation is cancelled under section 29U of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This includes requirements relating to board accountability, senior management responsibility, APRA’s powers to direct trustees to transfer MySuper assets, APRA notification and other minimum requirements relating to the transfer of MySuper assets. There are proposed requirements for receiving products.

Execution

RSE Licensees must execute transfers efficiently and with robust governance, risk and project management practices”

APRA notes the application to transfers of requirements in SPS 220 relating to risk management and SPS 521 relating to conflicts of interest and duty.

It is proposed that SPS 515 will be enhanced to include a requirement for all RSE licensees, following a decision to undertake a transfer, to ensure the business plan reflects how this decision will be implemented following a decision to undertake a transfer. This includes adjusting other plans as needed and maintaining business operations during implementation.

Our observations

There is no doubt room for enhanced governance in the execution of mergers and RSE licensees should certainly not wait for APRA’s proposed standards or guidance in relation to efficiencies, robust governance and risk management.

It is concerning, however, that APRA makes very little reference to the legal obligations that arise in mergers other than those made by APRA in prudential standards. APRA seems to show impatience towards these obligations and suggests compliance with the law needs to be balanced with pragmatism. APRA complains of timeframes being impeded by “unnecessarily extensive, and costly, approaches to due diligence” without acknowledging the trustee and directors’ covenants of care, skill and diligence, also a civil penalty provision. APRA refers to a partial transfer of members without acknowledging the covenants of trustees and directors to act fairly as between classes of members, a civil penalty provision.

SFTs can raise complex challenges for RSE licensees, however principles-based trust laws and covenants have long proved adequate signposts for the navigation of these issues. We query whether more prescriptive requirements are necessary or desirable and whether enhanced scenario planning, trigger frameworks and the audit of compliance with the same will only increase the drain of the retirement savings of members.

Next steps

Written submissions on the discussion paper are due by 10 March 2023. The paper includes specific consultation questions but general feedback is also encouraged.

Following the review of feedback and submissions, APRA plans to release draft transfer planning guidance for consultation.

APRA intends that new requirements relating to the transfer of MySuper assets would come into effect from 1 July 2023.

 

For further information, please do not hesitate to contact us.

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