Superannuation Industry (Supervision) modification declaration No. 1 of 2009 and Superannuation Industry (Supervision) modification declaration No. 2 of 2009

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Superannuation Industry (Supervision) Act 1993 (the Act), sections 332 and 335

The purpose of Superannuation Industry (Supervision) modification declaration No. 1 of 2009 (Modification Declaration No. 1 of 2009) is to revoke Modification Declaration No. 24 made on 21 June 2002. Superannuation Industry (Supervision) modification declaration No. 2 of 2009 (Modification Declaration No. 2 of 2009) remakes Modification Declaration No. 24 in identical form. 

1. Background

Modification Declaration No.24 made on 21 June 2002 was registered on the Federal Register of Legislative Instruments (FRLI) on 17 August 2006 (F2006B01171) in accordance with section 28 of the Legislative Instruments Act 2003 (LI Act). It was registered as ‘Modification Declaration No. 24’ but had in fact been published in the Commonwealth of Australia Gazette as ‘Modification Declaration No. 25’[1].

As a result of this discrepancy, two instruments were registered as ‘Modification Declaration No. 24’ on FRLI. The first was the instrument dated 21 June 2002 referred to above. The second is an unrelated instrument dated 2 May 2005, which modifies the operation of regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994.

In order to avoid possible confusion as a result of this numbering discrepancy, APRA has decided that the most appropriate course of action is to revoke Modification Declaration No. 24 made on 21 June 2002 and replace it with an identical instrument.

Modification Declaration No. 1 of 2009 and Modification Declaration No. 2 of 2009 take effect simultaneously on 20 October 2009 therefore there is no gap between the cessation of Modification Declaration No. 24 made on 21 June 2009 and the commencement of the replacement instrument.

2.                   Purpose of the instrument

Modification Declaration No. 1 of 2009 revokes Modification Declaration No. 24 made on 21 June 2002.

Modification Declaration No. 2 of 2009, which is identical in substance to Modification Declaration No. 24 made on 21 June 2002, allows an associate of an employer-sponsor to be an ‘independent trustee’, subject to conditions.

3.                       Operation of the instrument

Legislative Background

Part 9 of the Act, which contains sections 86 to 93A, sets out rules about equal representation of employers and members in relation to the management and control of standard employer-sponsored funds.

Paragraphs 92(3)(a) and 93(3)(a) of the Act stipulate that, if the funds to which the section applies are public offer superannuation funds, those funds must have an ‘independent trustee’, which is defined in section 10 of the Act to mean a trustee who is, inter-alia,  neither an ‘employer-sponsor’ of the fund nor an ‘associate’ of such an employer-sponsor.

An ‘employer-sponsor’ is defined in section 16(1) of the Act to be an employer who contributes to the fund (or who would, apart from a temporary cessation of contributions, contribute to the fund) for the benefit of a member of the fund who is an employee of the employer or an associate of the employer.

Section 12 of the Act defines ‘associate’ by reference to the Corporations Act 2001. Briefly, an associate of a person is someone who is in partnership with the person, or who is a trustee of a trust under which the person benefits, or who is a director of a company of which the person is also a director, or who acts or proposes to act with or is or proposes to be associated with the person in respect of a particular matter to which the statutory provision in which reference is made to ‘associate’ relates.

The purpose of paragraphs 92(3)(a) and 93(3)(a) is to promote trustee independence. However, these requirements also have a somewhat harsh effect in that they preclude the employees of a professional trustee, or of a subsidiary or holding company of the professional trustee, or of a company associated with the professional trustee in some other way, from joining a public offer fund operated by the professional trustee.

Section 93A of the Act was inserted in 1995 to give some relief from these strict independence requirements. It operates to allow a trustee who is an employer-sponsor of a fund to still be an independent trustee, provided certain conditions are met. These conditions are that the number of members in the fund employed by either the trustee or associates of the trustee must not exceed 10 per cent of the total number of fund members, and the value of accrued benefits of those members must not exceed 10 per cent of the total assets of the fund.

Explanation and Effect of Declaration

Modification Declaration No. 2 of 2009 modifies section 93A of the Act in identical terms to the revoked Modification Declaration to extend the relief provided by section 93A to an associate of an employer-sponsor.

APRA believes that just as an across-the-board prohibition on employees of professional trustees from being members of public offer superannuation funds operated by the professional trustee restricts the freedom of choice of the employees and is not in their interest, so does the prohibition on employees of associates of the professional trustee. APRA is of the view that such employees can join public offer funds of which an associate of their employer is the trustee while still maintaining the effective independence of the trustee from both the employer-sponsors (taken as a group) and the members (taken as a group).

By extending the reach of section 93A to associates of employer-sponsors, employees will not have to join a public offer fund operated by competitors of their employer, nor will the employer-sponsor, or its associates, be required to establish separate non-public offer funds for their employees when they already operate a suitable public offer fund.

The effect of this declaration is that an associate that is a trustee can now be considered an ‘independent trustee’ if:

(a)   the trustee together with any employer-sponsors of the fund who are associates of the trustee are not employer-sponsors of more than the allowable percentage of the members of the fund; and

(b)   the value of the accrued benefits of those members of the fund who have as an employer-sponsor either the trustee or an associate of the trustee is not more than the allowable percentage of the value of the assets of the fund; and

(c)   the trustee satisfies the requirements in paragraphs (a), (c), (d) and (e) of the definition of independent trustee in section 10.

Subsections 93A(2) to (6) will operate in respect of associates of employer-sponsors.

Commencement

Modification Declaration No. 1 of 2009 and Modification Declaration No. 2 of 2009 commence on 20 October 2009.

4. Consultation

No consultation has been undertaken in relation to Modification Declaration No. 1 of 2009 and Modification Declaration No. 2 of 2009 as Modification Declaration No. 2 of 2009 is identical in substance to Modification Declaration No. 24 made on 21 June 2002 and therefore existing arrangements have not been altered.

[1] See Commonwealth of Australia Gazette No. GN 49. 8 December 2004.