Second tranche of Stronger Super released - Superannuation Legislation Amendment (Trustee Obligations And Prudential Standards) Bill 2012

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15 December 2011

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:

  • expansion of the general duties of registrable superannuation entity (RSE) licensees;
  • application of new trustee duties for RSE licensees of RSEs offering a MySuper product;
  • application of personal duties to directors of corporate trustees; and
  • granting APRA the power to make prudential standards for the superannuation industry.

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.

Need to know

Expansion of duties of trustees of RSEs

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.

Increased standard applicable to s 52(2)(b)

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”.

Conflicts

Trustees will be required to do all things reasonably practicable to avoid conflicts where there is a conflict:

  • between the interests of the beneficiaries and the duties of the trustee to another person, or the interests of the trustee or an associate; or
  • between the duties of the trustee to the beneficiaries and the duties of the trustee to another person, or the interests of the trustee or an associate.

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.

Fair treatment of beneficiaries

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.

Investment covenant

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:

  • whether reliable valuation information is available in relation to the investments covered by the strategy;
  • the expected tax consequences for the entity in relation to the investments covered by the strategy;
  • the costs that might be incurred by the entity in relation to the investments covered by the strategy; and
  • any other relevant matters.

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.

Insurance covenant

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 kinds of insurance to be offered;
  • the levels of insurance cover to be offered;
  • the basis for the decision to offer those kinds of insurance with cover at those levels, having regard to the demographic composition of the beneficiaries of the entity; and
  • the method by which the insurers are to be determined.

The trustee must also covenant to:

  • consider the cost to all beneficiaries of offering insurance of a particular kind or at a particular level;
  • only offer such insurance if the cost does not inappropriately erode the retirement income of beneficiaries; and
  • do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success.

Risk covenant

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 activities, or proposed activities, of the trustee, to the extent that they are relevant to the exercise of the trustee’s powers, or the performance of the trustee’s duties and functions, as trustee of the entity; and
  • the risks that arise in operating the entity.

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.

Corrs comment

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.

Specific duties for RSE licensees offering a MySuper product

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:

  • promote the financial interests of MySuper product members, in particular, net returns;
  • determine on an annual basis whether the assets of the fund attributable to the MySuper product, and the number of MySuper product members, are sufficient to ensure the financial interests of the MySuper product members are not disadvantaged in comparison to the financial interests of MySuper product members within other funds;
  • include these determinations in the investment strategy for the MySuper product;
  • update each year in the investment strategy the investment return target for a 10 year period, and the appropriate level of risk taking into account the demographic composition of the class of beneficiaries who hold a MySuper product.

Covenants apply to directors

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.

Corrs comment

See our comments above in relation to the expansion of the duties of trustees of RSEs.

APRA prudential standards making power

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:

  • to protect the interests of the beneficiaries of the RSE;
  • to meet the reasonable expectations of the beneficiaries of the RSE;
  • to keep the RSE in a sound financial position;
  • to promote stability in the Australian financial system; and
  • in the appointment of auditors and actuaries.

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.

Next steps

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.


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Michael Chaaya

Partner. Sydney
+61 2 9210 6627

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Christine Maher

Consultant. Brisbane
+61 7 3228 9413

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