Life Insurance (prudential standards) determination No. 18 of 2007 Prudential Standard LPS 902 Approved Benefit Fund Requirements (Cth)
Life Insurance (prudential standards) determination No. 18 of 2007
Prudential standard LPS 902 Approved Benefit Fund Requirements
as amended
made under subsection 230A(1) of the
Life Insurance Act 1995
This compilation was prepared on 8 June 2011
taking into account amendments up to Life Insurance (prudential standard) determination No. 2 of 2011
Prepared by the Office of Legislative Drafting and Publishing,
Attorney-General’s Department, Canberra
I, John Roy Trowbridge, Member of APRA, delegate of APRA, under subsection 230A(1) of the LifeInsurance Act 1995 (the Act), DETERMINE Prudential Standard LPS 902 Approved Benefit Fund Requirements in the form set out in the Schedule, which shall apply to life companies that are friendly societies.
This determination takes effect on the later of 1 January 2008 and the date of registration on the Federal Register of Legislative Instruments.
Interpretation [see Note 1]
In this instrument:
APRA means the Australian Prudential Regulation Authority.
Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.
Schedule
Prudential Standard LPS 902 Approved Benefit Fund Requirements comprises the eight pages commencing on the following page.
Prudential Standard LPS 902
Approved Benefit Fund Requirements
| Objective and key requirements of this Prudential Standard This Prudential Standard is designed to ensure that the establishment, structure and operation of an approved benefit fund by a friendly society are fair and equitable for its members. The requirements are applicable to life companies that are friendly societies, registered under the Life Insurance Act 1995. In particular, this Prudential Standard addresses the requirements for:
|
Authority
This Prudential Standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act).
Application
This Prudential Standard applies to all life companies that are friendly societies registered under the Act.
The requirements determined by APRA as prudential standards are set out below in bold type. Administrative guidance and commentary is shown in normal print directly after the standard to which it relates. Headings are always in bold, but are administrative in nature, inserted for convenient reference only and have no effect in limiting or extending the language of provisions to which they refer. The administrative guidance and commentary does not purport to be exhaustive in its coverage of a friendly society’s rights or obligations under this prudential standard or any other law. Users of this prudential standard should obtain professional advice on the standard and other applicable legislation.
This prudential standard does not apply to approved benefit funds that exclusively deal with health insurance business carried on under the Private Health Insurance Act 2007 and in accordance with section 16ZB of the Act. A friendly society’s life insurance business is regulated under the Act while its health insurance business is regulated under the Private Health Insurance Act 2007.
Reference to Prudential Standards PS 2
Any reference in the Prudential Rules or prudential standards to Prudential Standards No 2 Approved Benefit Fund Requirements is to be taken as a reference to Prudential Standard LPS 902 Approved Benefit Fund Requirements.
Approved Benefit Fund Rules
. Subject to and for the purposes of the requirements of the Act as modified, a friendly society must have approved benefit fund rules that adequately provide for, amongst other things, the following matters with respect to each approved benefit fund:
(a) the name of the approved benefit fund;
(b) in addition to matters dealt with under the constitution of the company for the purposes of the Corporations Act 2001, terms and conditions governing the operation of the approved benefit fund and the rights and obligations of both the friendly society and a member of an approved benefit fund under the policy contract;
(c) nature of the business to be carried out by the approved benefit fund;
(d) contribution rates for benefits, including any minimum contributions;
(e) method of determination of benefit payments under each possible contingency and any required notice period before the benefit is payable;
(f) any guaranteed benefits;
(g) membership of the approved benefit fund;
(h) authorised investments of the approved benefit fund;
(i) whether the fund is a Defined Contribution or Defined Benefit fund, as set out in items 4 and 5 of this prudential standard;
(j) any costs or expenses which may be paid directly from the approved benefit fund;
(k) effect of taxation, including the method of calculation;
(l) whether the friendly society has the ability to make any transfers, by way of fees, transfer of surplus or otherwise, from the approved benefit fund to the management fund or other benefit funds;
(m) whether the friendly society has the ability to allocate or distribute surplus.
1.1 Inrelation to item 1(g), the approved benefit fund rules should include detail as to the criteria or qualifications for membership of the approved benefit fund.
1.2 Inrelation to item 1(h), section 43 (as modified by section 16J of the Act), prevents a friendly society from making an investment of assets of an approved benefit fund unless the investment is of a kind provided for by the approved benefit fund rules and complies with any requirements in Prudential Rules or the prudential standards. Further, the approved benefit fund rules should include detail of all the classes of investment in which assets of the approved benefit fund may be invested as well as an indication of the extent of investment in each particular class. For example, the approved benefit fund rules may specify percentage bands for each investment class showing the minimum and maximum proportion the investment may represent as a percentage of total assets of the approved benefit fund. Approved benefit fund rules may also provide information on the general policy to be followed in determining the investments of the approved benefit fund.
1.3 Further in relation to item 1(h), subsection 34(4A) of the Act (as inserted by the modifications made by section 16H of the Act), provides that a friendly society may invest assets of 2 or more approved benefit funds in a single investment if the approved benefit fund rules of each of those funds provide for such an investment and if the investment complies with any applicable Prudential Rules (Prudential Rules No 45) or prudential standards.
1.4 In relation to item 1(k), the approved benefit fund rules should include detail of the method of charging tax expense to the approved benefit fund and the effect of taxation on the calculation of benefit amounts.
1.5 In relation to item 1(m), the Life Insurance Regulations 1995 (made for the purposes of section 16ZC of the Act) provide for the substitution of Divisions 5 and 6 of Part 4 of the Act with a new section 56. This section, among other things, provides for the distribution of surplus on the written advice of the appointed actuary. Items 8 to 10 of this prudential standard also refer to matters relating to surplus.
1.6 Prudential Rules No 37 made under section 53 of the Act sets out requirements for termination of an approved benefit fund, including requirements for application of assets upon termination. As part of this process, consideration is given to the approved benefit fund rules for application of assets upon termination. A friendly society should therefore consider the inclusion of rules for the application of assets on the termination of the approved benefit fund as part of its approved benefit fund rules.
Transitional – Benefit Fund Rules
. A friendly society:
(a) to which subitem 11(1) of Division 5 of Part 1 of Schedule 8 of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 (“FSR (A&TP) Act”) applies, must, by virtue of subitem 11(9) and subject to subitem 11(10) of that Act, comply with item 1 of this prudential standard before 31 December 2000; and
(b) to which paragraph (a) above does not apply, must comply with item 1 of this prudential standard from the transfer date.
2.1 Inrelation to item 2(a), benefit fund rules existing prior to the transfer date, which are taken to be approved by subitem 11(8) of Schedule 8 of the FSR (A&TP) Act, must adequately provide for all matters set out in item 2 of this Prudential Standard before 31 December 2000. In relation to item 2(b), all the matters set out in item 1 of this prudential standard need to be adequately provided for in benefit fund rules for a benefit fund established on or after the transfer date if APRA is to consider approving the benefit fund rules.
2.2 In relation to a friendly society to which item 2(a) applies, Division 5 of Part 1 of Schedule 8 of the FSR (A&TP) Act, amongst other things, provides that
(a) all existing benefit fund rules of eligible benefit funds (defined by item 10 of Division 5), are taken, on the transfer date, to have been approved by APRA under section 16L and to have come into force under section 16N of the Act on that date (subitem 11(8) of Division 5);
(b) a provision of existing benefit fund rules is not effective to the extent that it is inconsistent with the Act, (the “Act” includes Prudential Rules and prudential standards) (subitem 11(9) of Division 5). However, this provision does not override item 2(a) above which sets out transitional requirements giving relevant friendly societies until 31 December 2000 to fully comply with item 1 of this prudential standard; and
(c) APRA may determine that a deemed approval under subitem 11(8) of Division 5 ceases to have effect if the existing benefit fund rules are, amongst other things, inconsistent as mentioned in subitem 11(9) of Division 5. Such a determination can only be made during a period that starts 18 months, and ends 30 months, after the transfer date (subitem 11(10) of Division 5).
2.3 In relation to a friendly society to which item 2(b) applies, APRA will consider the friendly society’s compliance with this prudential standard when exercising its powers and performing its functions under Part 2A of the Act, including approving benefit fund rules under section 16L, and approving amendments to approved benefit fund rules under section 16Q or section 16R of the Act.
2.4 Prudential Rules No 40 provide for the approval of benefit fund rules under section 16L of the Act and also requires the friendly society to certify that the benefit fund rules submitted to APRA for approval comply with this prudential standard. Similarly, Prudential Rules No 41 provide for the approval of amendment to approved benefit fund rules under section 16Q, and requires a friendly society to state whether the approved benefit fund rules, as proposed to be amended, comply with this prudential standard.
Classification of Approved Benefit Funds
. For the purposes of this prudential standard, a friendly society must classify an approved benefit fund as either Defined Contribution or Defined Benefit.
. Subject to items 5 - 7
(a) an approved benefit fund should be classified as Defined Contribution where the benefit is derived from contributions made by the member, in accordance with the approved benefit fund rules, together with the investment performance of the assets of the approved benefit fund; and
(b) an approved benefit fund should be classified as Defined Benefit where the amount of any benefit is specified in, or determined in accordance with, a formula set out in approved benefit fund rules and the amount of the benefit is not directly related to the assets of the approved benefit fund or the investment performance of those assets.
4.1 The requirements relating to surplus allocation or distribution as set out in this prudential standard depend on whether the approved benefit fund is classified as Defined Contribution or Defined Benefit.
4.2 Indicative examples of Defined Benefit funds include traditional risk products (such as whole of life and endowment assurance) as well as modern risk products (such as term insurance, life or term annuities or disability income).
4.3 DefinedContribution funds would include investment account, investment linked and education benefit funds.
. Where an approved benefit fund provides for a benefit which meets the characteristics of both items 4(a) and (b), then the approved benefit fund must be classified as either Defined Benefit or Defined Contribution according to the dominant characteristics of that benefit.
5.1 An approved benefit fund may have both Defined Benefit and Defined Contribution elements. For example, traditional life insurance funds such as whole of life and endowment assurance funds may have been designed as traditional life insurance “with profit” policies in which bonuses, reflecting, amongst other things, the investment performance of the assets, are added to the guaranteed Defined Benefits. Others, such as funeral funds, may take the form of either Defined Benefit or Defined Contribution funds.
. A friendly society may apply to APRA for a written determination of the classification of any approved benefit fund.
. Notwithstanding any determination under item 6, APRA may, by written notice, determine the classification of any approved benefit fund of a friendly society.
7.1 An APRA determination may be made where it is sought by the friendly society or where APRA has reviewed the approved benefit fund rules and is satisfied that such a determination should be made.
Allocation or distribution of Approved Benefit Fund surplus
. The board of a friendly society must seek and consider the written advice of the appointed actuary prior to making any allocation or distribution of surplus under modified section 56 of the Act with respect to each approved benefit fund of the friendly society. The appointed actuary's advice must include, as applicable:
(a) the effect of the proposal on the approved benefit fund’s compliance with the applicable solvency and capital standards under the Act;
(b) whether or note the proposed distribution is consistent with representations made to members;
(c) the level of unallocated surplus after the proposed allocation or distribution, relative to the liabilities of the fund, and whether or not the level is unduly large;
(d) the extent to which level of unallocated surplus may give rise to undue intergenerational inequity;
(e) the extent to which the proposal is fair and equitable as regards different members of the particular approved benefit fund and the general membership of the friendly society;
(f) the extent to which the proposal would equitably reflect the relative contribution of different members to the creation of the surplus;
(g) the extent to which the surplus has arisen due to management fund fees being less than the cost of servicing the approved benefit fund;
(h) the possible and probable effects of the proposal on the finances of the approved benefit fund, and the friendly society more generally; and
(i) the probable future course of surplus creation in the approved benefit fund and hence the probable future surplus available for allocation or distribution.
. For the purposes of modified subsection 56(3) of the Act, a friendly society, with respect to a Defined Contribution fund:
(a) must not distribute any surplus arising in that fund to the management fund or to another benefit fund; and
(b) must:
(i) allocate or distribute any surplus of that fund to members of that fund;
or
(ii) leave it as unallocated surplus of that fund; and
(c) may make transfers (which exclude surplus, but may include any fees) from that fund to the management fund only if the approved benefit fund rules of the fund provide expressly for such transfers.
. For the purposes of modified subsection 56(3) of the Act, a friendly society, with respect to a Defined Benefit fund may, in accordance with approved benefit fund rules, allocate or distribute any surplus to one or more of the following:
(a) the members of the approved benefit fund;
(b) the management fund; or
(c) another benefit fund of the society.
Seed capital
11. Subject to item 12, a friendly society may transfer an amount from the management fund to an approved benefit fund with prior written approval from APRA. Such an amount is “seed capital”. The friendly society may use such seed capital for the purposes of meeting the Capital Adequacy Requirement for the Benefit Fund.
11.1 TheCapital Adequacy Requirement is set out in Prudential Standard LPS 3.04 Capital Adequacy Standard (LPS 3.04) The Act does not preclude friendly societies injecting management fund capital into an approved benefit fund which could later be repaid to the management fund, but any such repayment must comply with item 12 of this prudential standard as set out below.
11.2 Seedcapital may be paid from the management fund to either a new benefit fund or an existing approved benefit fund, but must not be regularly transferred from the management fund to a particular approved benefit fund.
. A friendly society must not repay seed capital from an approved benefit fund to the management fund:
(a) unless the approved benefit fund, after any such repayment, continues to meet the Capital Adequacy Requirement; and
(b) if any interest paid to the management fund in relation to the seed capital exceeds the earning rate of the approved benefit fund during the period when the seed capital forms part of the approved benefit fund.
12.1 Therepayment of seed capital does not constitute an allocation or distribution of surplus under section 56 of the Act.
13. Any seed capital provided from the management fund to an approved benefit fund is inadmissible for the purposes of the Management Fund Capital Requirement set out in Prudential Standard LPS 6.03 Management Capital Standard.
Provision of financial benefits
. A friendly society must not pay, or provide for the payment of, amounts to which a member of the society or any other person may be, or become, entitled because of contributions, or payments made to the friendly society (whether by that member or person or by another person) unless the friendly society):
(a) maintains an approved benefit fund for the receipt of such contributions and payments; and
(b) pays those amount as benefits from the approved benefit fund.
15. Item 14 does not apply to amounts payable by a friendly society
(a) in respect of shares of the friendly society; or
(b) as trustee for a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act 1993.
15.1 Except for the exclusions provided by item 15 above, if a friendly society wishes to provide financial benefits to a member as a result of financial contributions, an approved benefit fund must be maintained both to accept the contributions and pay the monetary benefit.
Unsecured borrowings of an Approved Benefit Fund
16. For the purposes of subsection 38(4) of the Act, a friendly society must not borrow money by means of unsecured borrowing, for the purposes of the business of an approved benefit fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.
For the purposes of this paragraph 16 “free assets”, in relation to an approved benefit fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.
Notes to the Life Insurance (prudential standards) determination No. 18 of 2007
Prudential standard LPS 902 Approved Benefit Fund Requirements
Note 1
The Life Insurance (prudential standards) determination No. 18 of 2007 – Prudential standard LPS 902 Approved Benetit Fund Requirements (in force under subsection 230A(1) of the Life Insurance Act 1995) as shown in this compilation is amended as indicated in the Tables below.
Table of Instruments
| Year and | Date of FRLI registration | Date of | Application, saving or |
| Life Insurance (prudential standards) determination No. 18 of 2007 | 24 Dec 2007 (see F2007L04940) | 1 Jan 2008 | |
| Life Insurance (prudential standard) determination No. 2 of 2011 | 18 May 2011 (see F2011L00795) | Para. (a) and (b):18 May 2011 | — |
Table of Amendments
| ad. = added or inserted am. = amended rep. = repealed rs. = repealed and substituted | |
| Provision affected | How affected |
| LPS 902 | |
| Summary...................................... | am. No. 2 of 2011 |
| para. 16......................................... | ad. No. 2 of 2011 |
0
0
0