Licensing Pension Funds and Trustees

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Licensing Pension Funds and Trustees Conference
on Supervision of Pension Systems Warsaw 17 - 19
September 2006 Ross Jones Deputy
Chairman Australian Prudential Regulation
Authority
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Outline

• Elements of the Australian pensions systems
• Role of the Australian Prudential Regulation
  Authority
• Licensing regime for pension funds
• Licensing standards

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Element of the Australian Pension System to 1980s

• Safety net age pension introduced 1909 and funded
  by government tax revenue on a pay as you go
  basis. Set at 25 average weekly earnings.
• Mix of public sector and private sector
  arrangements. Generally defined benefits schemes
  supported by employer. Coverage less than 40 of
  workforce.

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Australian Pension Systems 2006

• Safety net age pension.
• Compulsory superannuation employer contribution
  of 9 of wages or salary preserved until
  retirement. Coverage more than 90 of workforce.
• Voluntary superannuation encouraged by tax
  concessions generally preserved until retirement.

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Australian Pension Systems 2006

• Rapid growth over past 10 years to over US700
  billion.
• Most of the funds are defined contributions with
  members bearing the investment risk.
• Employees have the right to choose the fund into
  which their employer pays the compulsory 9.
• Employees can move their savings from one fund to
  another.

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APRAs Role

• To enforce prudential standards and practices so
  that under all reasonable circumstances,
  financial promises made by institutions we
  supervise are met within a stable, efficient and
  competitive financial system.

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APRAs Prudential Approach

• We follow a risk based approach to pension
  supervision.
• This involves forming a risk assessment of
  pension funds and setting and implementing
  supervision strategies based on the risk
  assessment.

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Licensing regime for pension funds

• Trustees must meet a fitness and propriety
  standard.
• Trustees must have adequate financial, technical
  and human resources to conduct operations.
• Trustees must develop and implement a risk
  management framework.
• Where trustees outsource material business
  activities to service providers, an enforceable
  agreement meeting prescribed conditions must be
  in place.

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Why introduce licences?

• Pension funds are now subject to similar
  requirements as deposit taking institutions and
  insurance providers, the other prudentially
  supervised industries.
• Pension funds are now subject to prudential
  standards which govern their financial and risk
  management performance.
• Pension funds are required to have a higher level
  of transparency and disclosure to members.

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Immediate impact of licensing

• At commencement of licensing period in July 2004,
  there were 1100 trustees eligible to apply.
• Over the two year licensing period, 325 made
  applications, 15 subsequently withdrew and one
  was declined.
• Consequently there are now fewer, but larger and
  more complex pension funds.

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Licensing Standards 1 Fitness and Propriety

• Applicants must have policies to ensure integrity
  of persons running the pension fund with regard
  to skills, training needed, minimum standards of
  probity and dealing with conflict of interest.

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Licensing Standards 2 Outsourcing Requirements

• Many Australian funds outsource administration,
  investment management and custodianship.
• All outsourced arrangements must be established
  via a formal written contract setting out price,
  delivery, monitoring, rights.
• APRA must be given access to all operations of
  third parties.

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Licensing Standards 2 Outsourcing Relationships

• Evidence as to why using service providers is in
  the interest of members rather than in-house
  provision.
• Evidence of how the trustee can terminate the
  arrangements if service provider performance is
  inadequate.

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Licensing Standards Public Offer Fund
Requirements

• The Australian pensions industry structure
  permits public offer and non-public offer funds.
• Public offer funds are permitted to offer
  superannuation products to any person while
  non-public offer funds are limited to specific
  groups.
• Trustees of public offer funds face additional
  risks and are required to hold capital to absorb
  any potential losses.

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Licensing Standards Risk Management Strategy

• Trustees must show material risks facing its
  operations, how these risks have been rated, and
  risk mitigation strategies.
• Requirement that trustees consider compliance
  risk, governance risk, outsourcing risk, and risk
  of theft and fraud.

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Where to next?

• Need to monitor the undertakings made by trustees
  with regard to policies and procedures put in
  place.
• Increased interaction with industry advisers such
  as auditors, actuaries in areas such as the audit
  of trustee risk management statements and plans.
• Further supervisory examination of service
  providers.