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Superannuation Industry Stewardship Group special briefing 17 March 2022

Key topics discussed at Superannuation Industry Stewardship Group special briefing 17 March 2022.

Last updated 12 April 2022

Welcome and introduction

The Chair opened the meeting and handed over to the Australian Prudential Regulation Authority (APRA) to lead the discussion on Strengthening Financial Resilience and the Financial Contingency and Resolution Planning Framework.

APRA released a Strengthening the Financial Resilience in superannuation (PDF 999KB)This link will download a filediscussion paper on 19 November 2021, seeking feedback from superannuation trustees and other industry stakeholders on the current and emerging approaches for registrable superannuation entity (RSE) licensees to maintain the financial resilience needed to protect members’ best financial interests.

APRA is seeking to understand and obtain insights on:

  • current approaches to the management of financial resources
  • the use of the operational risk financial requirement (ORFR) more broadly
  • reserving practices
  • the protections afforded to RSE licensees via insurance
  • provisioning for contingency expenditure items
  • how these practices may evolve and be adapted over time.

Submissions on the discussion paper closed 11 March 2022. Superannuation Industry Stewardship Group (SISG) members were offered a minor extension to submit feedback if they had not already done so.

Strengthening the financial resilience in superannuation

Key points of discussion included:

  • The financial resilience of the superannuation industry is critical to ensuring stability.
  • Every RSE licensee must be financially resilient to ensure the continued delivery of improved member outcomes and the ability to operate in the best financial interests of beneficiaries.
  • The discussion paper is looking at financial resilience across the spectrum, focusing on how trustees are managing their business operations and their resources.
  • RSE licensee must form a view of their required level and structure of financial resources and manage these to suit their particular circumstances. This means having sufficient financial resources to fund and operate a business, deliver on the business plans and fund contingency expenditure items.
  • Robust planning and preparation for the risk of unexpected expenditure are key to achieving financial resilience.

APRA insights

APRA insights and industry views coming out of submissions so far include:

  • Feedback is supportive of the paper and the alignment between financial management, resilience requirements and contingency planning in a more holistic approach.
  • Many consider the ORFR to have been appropriate when it was established but are now questioning fitness for purpose given industry evolution and providing views on changes to relevant requirements and guidance.
  • Trustees need financial resources to address the risks they are exposed to. There are differences of options on how these can or should be funded.
  • There are challenges with the availability and the cost of insurance.
  • It is important the prudential framework keeps up to pace with the evolving superannuation industry.

SISG members comments and observations on the discussion paper included:

  • Generally, people are supportive of the overall direction of the paper and agree there the needs to be a holistic approach to strengthening the financial resilience in superannuation and the need for flexibility.
  • Is there a need for mandatory levels of financial resources in superannuation and to what degree can APRA do that without the intervention of parliament?

Strengthening crisis preparedness

On 2 December 2021, APRA released a discussion paper and two draft prudential standards to strengthen crisis preparedness across banks, insurers and superannuation trustees for consultation.

Written submissions are requested by 29 April 2022.

Discussion focussed on the Financial Contingency and Resolution Planning FrameworkExternal Link and the key aspects of the draft prudential standards which APRA is consulting on:

  • Draft Prudential Standard CPS 190 Financial Contingency Planning introduces requirements for all APRA-regulated entities to develop contingency plans to respond to financial stress by either recovering their financial resilience or exiting APRA-regulated activities in an orderly manner.
  • Draft Prudential Standard CPS 900 Resolution Planning requires large or complex entities, or those that provide critical functions to the economy, to be prepared for resolution to minimise the impact on the community and the financial system.

Key points discussed:

  • The new resolution planning standard seeks to ensure that, in the unlikely event of an entity failure, collectively beneficiaries remain protected and critical functions can continue to be provided, with minimal risks to financial stability.
  • The disorderly failure of a financial entity can have significant impacts for financial system stability and the broader economy.
  • The superannuation financial contingency planning and resolution planning is focused on developing the plans to manage stress at the trustee level.
  • APRA-regulated entities must be prepared to manage situations that could threaten their viability through developing effective financial contingency plans.
  • In introducing new proposed prudential requirements, APRA has sought to take a proportionate approach for smaller or less complex entities, that is, smaller entities would be subject to fewer requirements compared to larger entities.
  • For financial contingency planning (CPS 190), entities are able to meet APRA’s requirements in a way that is appropriate to their particular business model and the risks they present to the financial system.

Next steps

Following consultation, APRA plans to finalise draft prudential standards CPS 190 and CPS 900 in late 2022.

The new prudential standards are expected to be implemented under a staged approach:

  • CPS 190 would come into effect on 1 January 2024 for banks and insurers and on 1 January 2025 for the superannuation industry.
  • CPS 900 would come into effect on 1 January 2024.

APRA also plans to develop accompanying guidance to assist entities in meeting their new requirements by mid-2022. APRA’s draft guidance will be finalised at the end of 2022.

The Chair thanked APRA for providing an opportunity for SISG members to discuss Strengthening Financial Resilience and the Financial Contingency and Resolution Planning Framework in more detail and get some insights on APRA’s direction.