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EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority
Life Insurance Act 1995
Prudential Rules Number 45
Subsection 252(1) of the Life Insurance Act 1995 (the “Act”) provides that the Australian Prudential Regulation Authority (“APRA”) may, in writing, make rules prescribing all matters required or permitted by the Act to be prescribed by Prudential Rules. Subsection 252(2) of the Act provides that such Prudential Rules are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901.
This Prudential Rule is made for the purposes of subsection 16H(4A) of the Act. This subsection provides that a friendly society may invest assets of 2 or more approved benefit funds in a single investment provided that the rules of each benefit fund allow for such an investment and that the investment complies with the Prudential Rules. A health insurance benefit fund regulated under the National Health Act 1953 (Cth) is not an approved benefit fund for the purposes of the Act. A health insurance benefit fund must not, therefore, contribute to a single investment. Similarly, a joint investment must not be undertaken between one or more approved benefit funds and the management fund.
The single investment is referred to as a joint investment, each of the approved benefit funds with an interest in the joint investment is referred to as a contributing fund and the assets of a fund that are invested in the joint investment are referred to as the benefit fund’s contribution. That is, an approved benefit fund’s contribution at any time is its interest in the joint investment, both in terms of initial investment and subsequent transactions.
This Prudential Rule specifies various accounting procedures for the maintenance and administration of joint investments. The overall aim of these procedures is to maintain accountability and transparency between the joint investment and the contributing benefit funds. These procedures are necessary in order that the principles enunciated in subsection 34(3) of the Act are met. That principle is that a friendly society must keep the assets of each approved benefit fund distinct and separate from:
the assets of any other approved benefit fund; and
from any other assets of the friendly society.
Any joint investments must be able to be readily liquefied. The reason for this is that each contributing approved benefit fund must be able to redeem its investment in an expeditious manner with no undue effect on other contributing approved benefit funds. For example, a number of approved benefit funds investing in a single property would not be an appropriate joint investment, whereas a joint investment in listed shares, government securities, bank or commercial bills would be appropriate as there exists a ready secondary market for such investments.
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The operation of the joint investment must not result in the asset exposures of a contributing approved benefit fund being affected by the investment decisions of another contributing approved benefit fund. This precludes, for example, management of joint investments by way of an internal unitised pool of joint investments; as transactions between the pool and a given contributing benefit fund would alter the proportion of the different pooled assets attributable to each other contributing benefit fund participating in the pool.
A friendly society is permitted to use the services of a custodian in relation to a joint investment, provided that the joint investment is invested in the name of the friendly society.
Section 45 of the Act provides that a friendly society must not transfer an asset from one approved benefit fund to another approved benefit fund, except in the situation where the asset is transferred at fair value or in accordance with Divisions 3, 4 or 6 of Part 4 of the Act. The operation of the joint investment is not to contravene section 45 of the Act, such that loans must not be created between contributing approved benefit funds.
The Prudential Rule specifies prescribed time periods within which the benefit fund accounts must be reconciled with the investment register. In the main, the reconciliation process must be performed at least every 7 days (or at other such time as permitted by APRA), except where the investment relates to unitised contracts or where the society conducts a mark to market exercise where more frequent reconciliation may be required. APRA may permit a friendly society to conduct the reconciliation process less frequently than once every 7 days, where APRA is satisfied that the friendly society’s joint investment is relatively stable with insufficient transactions to warrant weekly reconciliation.