Final APRA superannuation industry prudential standards and new draft prudential practice guides
07/01/2013
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The overhaul of the regulation of the superannuation industry continues apace.  Following the publication of APRA’s final prudential standards for the superannuation industry on 15 November 2012, the first 10 draft superannuation industry prudential practice guides were released for consultation on 11 December 2012, together with an accompanying discussion paper.  A second set of draft prudential practice guides will be released for consultation in the second quarter of 2013.

The majority of the requirements in the prudential standards will take effect on 1 July 2013.

So far as remuneration is concerned, all forms of remuneration, from all sources, are caught by the prudential standard SPS 510. SPS 510 ‘Governance’ requires that:

  • the board have a policy on board renewal and procedures for assessing board performance, and
  • a board remuneration committee must be established, and the registrable superannuation entity licensee must have a remuneration policy, approved by the board, that aligns remuneration and risk management.

Key requirements in relation to remuneration policy include:

  • The remuneration policy must outline the remuneration objectives and the structure of the remuneration arrangements, including the performance-based remuneration components (‘remuneration arrangements’ include measures of performance, the mix of forms of remuneration (fixed, variable, cash, equity) and the timing of the eligibility to receive payments)
  • Performance based remuneration must be designed to encourage behaviour that supports:
    • protecting the interests and meeting the reasonable expectations of beneficiaries
    • the long-term financial soundness of the RSE licensee, its RSEs and connected entities
    • the RSE licensee’s risk management framework
  • Performance-based remuneration must be designed to align remuneration with prudent risk taking, and must incorporate adjustments to reflect:
    • the outcomes of the RSE licensee’s business operations
    • the risks related to those business operations
    • the time necessary for the outcomes of those business operations to be reliably measured
  • It must be possible to adjust the performance-based components of remuneration downwards, to zero if appropriate, where adjustments are necessary to protect the financial position of the RSE licensee, etc. or for the purposes of other prudential matters, or to respond to significant unintended consequences
  • The remuneration for risk and financial control personnel, including any performance-based components, must be structured so it does not compromise their independence
  • The remuneration policy must form part of the RSE licensee’s risk management framework, and must be provided to APRA on request
  • RSE licensees must have a remuneration committee with at least three members and consisting only of non-executive directors.

The draft superannuation prudential practice guides make only limited reference to remuneration-related issues.  Draft SPG 220 ‘Risk Management’ identifies remuneration arrangements as a governance risk, but recognises that remuneration policies can contribute to a strong risk culture if they are designed to encourage and incentivise employees to act responsibly and with integrity, and consistently with the licensee’s risk management framework. 

Superannuation funds will be expected to follow a similar approach to remuneration as other APRA-regulated industries, with SPG 220 referring superannuation funds to PPG 511 ‘Remuneration’ (released in November 2009) for guidance on the design of remuneration policies.

In relation to the composition of the board, the principles set out in draft prudential practice guide SPG 510 – ‘Governance’, indicate that APRA considers it prudent practice for a board to “closely consider whether it would be appropriate” to include independent or non-affiliated directors on its board remuneration committee and board audit committee.

The discussion paper provides an overview of the prudential framework for superannuation and the role of PPGs, plus APRA’s response on substantive guidance matters raised in submissions on the previous consultation packages, in particular on the draft prudential standards.

Submissions on the discussion paper and PPGs must be made to APRA by 5 March 2013.

The discussion paper and draft PPGs are available on the APRA website HERE.

© Guerdon Associates 2021
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