The Government has released the draft legislation and explanatory memorandum for the second tranche of its Stronger Super reforms. Our earlier In Brief dated 30 September 2011 discussed the core framework of the MySuper product announced in the first tranche of legislation, which was introduced to Parliament on 3 November 2011.
The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 (draft legislation) makes substantial amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act). The key changes which will be implemented by the draft legislation are the:
Subsequent tranches of legislation will address further reforms including requirements in respect of insurance, additional disclosure requirements and rules associated with MySuper products, and arrangements for the transition process from existing default superannuation products to the MySuper product regime.
The draft legislation substantially expands the trustee covenants under s 52 of the SIS Act which are deemed to be included in the governing rules of a superannuation entity. The draft legislation increases the standard applicable under s 52(2)(b) from the ordinary prudent person to the “prudent superannuation trustee”. The draft legislation also prescribes detailed requirements regarding conflicts and the treatment of beneficiaries, and prescribes specific covenants in the areas of investment, insurance, and risk.
The draft legislation heightens the current standard applicable to s 52(2)(b) by replacing the ordinary prudent person with the “prudent superannuation trustee”. This term is defined as a person “whose profession, business or employment is or includes acting as a trustee of a superannuation entity and investing money on behalf of beneficiaries of a superannuation entity”.
Trustees will be required to do all things reasonably practicable to avoid conflicts where there is a conflict:
Where such a conflict exists, the trustee must give priority to the duties to and interests of beneficiaries. Furthermore, the draft legislation provides that the duty to give priority to beneficiaries overrides any conflicting duty an executive officer or employee of the trustee has under Part 2D.1 of the Corporations Act 2001.
The draft legislation requires the trustee to act fairly in dealing with all classes of beneficiaries within the entity, and not to give beneficiaries of one class an unfair advantage over another. The trustee must also act fairly when dealing with all beneficiaries within a class, and must not give a beneficiary of the class an unfair advantage over another beneficiary of the class.
The current covenant to formulate and give effect to an investment strategy that has regard to the whole of the entity has been expanded. In addition to the existing elements to which the trustee must have regard, the trustee must also have regard to the following:
The trustee must also covenant to exercise due diligence in developing, offering and reviewing regularly each investment option, and must ensure that investment options offered to each beneficiary allow adequate diversification.
The draft legislation now deems an insurance covenant into the governing rules of a superannuation entity. The trustee must covenant to formulate, review regularly and give effect to an insurance strategy for the benefit of the beneficiaries of the entity that includes provisions addressing each of the following matters:
The trustee must also covenant to:
The draft legislation also deems a risk covenant to be included in the governing rules of the superannuation entity. The trustee must covenant to formulate, review regularly and give effect to a risk management strategy that relates to:
The trustee must also covenant to maintain and manage, in accordance with the prudential standards, financial resources to cover the operational risk that relates to the entity.
During the consultation on the Stronger Super proposals, the consultative group led by Paul Costello and the Committee he led was given considerable feedback about the limitations of the proposed “office of trustee-director” and associated duties attaching to that role. While the notion of a separate office was ultimately rejected by the government, it seems the draft legislation has allowed the issue to resurface.
The proposals amount to much more than a mere tinkering of the covenants under s 52 of the SIS Act. The draft legislation includes a distinctly new set of duties being imposed on both trustees and directors. Although some sound superficially similar to those in the Corporations Act 2001 and other legislation, they will likely result in an entirely new set of obligations for trustees and directors. These new covenants will require fresh judicial and academic discourse to clearly define their scope, and until such time has elapsed, confusion about the scope of the proposed duties is likely to remain.
Implicit in the drafting is a suggestion that trustees do not already consider the types of matters to be prescribed as part of the proposed conflicts, investment, insurance and risk covenants. As a matter of general law (and under the existing s 52 covenants) trustees are regularly discharging their obligations by having regard to these very matters. Prescribing them in legislation runs the risk of regulatory overkill and an entirely restrictive regime for trustee decision making and governance. For these and other reasons, we anticipate this aspect of the proposed legislation will be contentious across the industry.
In addition to the expanded general duties of RSE licensees outlined above, the draft legislation prescribes further duties for RSEs offering a MySuper product. Trustees must:
The draft legislation requires directors of a corporate trustee to exercise a reasonable degree of care and diligence to ensure the corporate trustee carries its specific duties in relation to MySuper products, in addition to retaining the current duty with respect to the s 52 covenants of the trustee.
However, the draft legislation also now deems certain covenants to apply to individual directors of the trustee. This is a significant difference from the current covenant regime.
The draft legislation expands the application of the covenants under paragraphs 52(2)(a), (b), (c) and (e) to apply to directors as well as to trustees. The heightened standard for s 52(2)(b) also applies to directors, with the ordinary prudent person being replaced in the case of directors by the “superannuation entity director”, which is similarly defined as a person “whose profession, business or employment is or includes acting as director of a corporate trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity”.
The draft legislation also applies the new duties regarding conflicts (discussed above) to directors. As in the case of trustees, where such a conflict exists, the director must give priority to the duties to, or interests of, the beneficiaries of the entity.
The draft legislation also provides that the duty applicable to directors overrides any conflicting duty an executive officer or employee of the corporate trustee has under Part 2D.1 of the Corporations Act 2001.
See our comments above in relation to the expansion of the duties of trustees of RSEs.
The draft legislation grants APRA the power to make prudential standards for the superannuation industry. These standards are legislative instruments, and are therefore disallowable in the Senate.
The prudential matters in relation to which APRA may determine a prudential standard are broad, and include regulating the conduct of RSE licensees:
APRA has indicated that it will amalgamate and reissue much of its current published material in light of its new power, and has announced that it will release 11 prudential standards. An analysis of these proposed prudential standards is available in our In Brief published on 14 October 2011.
This second tranche of the Stronger Super reforms has introduced significant changes to the regime of duties applicable to both trustees of RSEs and their directors, and has indicated some of the further regulatory requirements for those RSEs offering MySuper products. Further reforms will be addressed by subsequent tranches of legislation.
You need to consider the scope of these proposed changes and how they may impact on your business. The expansion of duties is significant in its breadth and impact.
Corrs has a financial services team with the skills and expertise to help with submissions and to assist you with the impact of the proposed prudential standards on your business.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.