Although existing superannuation organisations will have three years to transition to proposed changes to the Superannuation Industry (Supervision) Act 1993 (The SIS Act), by 1 July 2016 they will need to formulate a transition plan on an individual Director basis to submit to the Australian Prudential Regulation Authority (APRA).
Treasury released draft legislation at the end of June that requires registrable superannuation entity (RSE) licensees to have Boards comprising one third independent Directors and an independent Chairman by the end of the next three years.
Independence has been defined in the legislation as:
A person is independent from an RSE licensee if the person:
(a) does not have, and is not directly associated with a person who has, a substantial holding (within the meaning of the Corporations Act 2001) in the RSE licensee, or in another entity that is a member of the same group as the RSE licensee; and
(b) does not have a material relationship with, and is not employed by an entity that has a material relationship with: (i) if the RSE licensee is a body corporate – the RSE licensee; or (ii) if the RSE licensee is a group of individual trustees – any of the trustees; and
(c) has not at any time in the last 3 years been an executive officer or director of a body corporate that has, or has at any time in the last 3 years, had a material relationship with: (i) if the RSE licensee is a body corporate – the RSE licensee; or (ii) if the RSE licensee is a group of individual trustees – any of the trustees.
Currently employer-sponsored superannuation fund trustee Boards are required to have an equal number of employer representative members and member representative directors, a requirement that will be repealed under the proposed legislation. Super organisations in existence before July 2016 have a three-year transition period where they will be allowed to breach both the equal representation requirements and independence obligations.
The legislation provides APRA with new powers and requirements. To meet its obligations under the legislation, APRA has announced its intention to:
- Introduce a new Prudential Standard SPS 512 Governance Transition (SPS 512) to support super organisations’ transition to the new framework and support this standard with further guidance.
- Amend Prudential Standard SPS 510 Governance (SPS 510) to support the proposed legislation.
- Review and extend Prudential Practice Guide SPG 510 (SPG 510) to align it with the new legislation and prudential standard.
Drafts of the standards are to be released later in 2015, with the final standards to take effect on 1 July 2016.
Regarding the new prudential standard SPS 512, APRA has proposed that:
- Organisations create and implement a transition plan to ensure effective functioning of the Board and timely adoption of the new requirements. The plan (which is to be submitted to APRA) must be prepared and approved by the Board in time for the 1 July 2016 commencement date of the legislation. The plan will include:
- A list of current Directors and whether they would be independent under the new legislation.
- The Board’s plan for each individual Director throughout the transition period including whether they will replaced, when this is likely to occur and when each Director’s term expires.
- The Board’s target number of Directors and independent Directors.
- Key milestones throughout the transition period.
- Boards assess, monitor and review transition risks during the three-year period, identifying and managing impediments to compliance.
- Boards meet governance requirements in SPS 510 at all times during the transition period, including maintaining an appropriate range of Board skills.
Regarding the amendment of SPS 510, APRA has proposed that:
- Examples of “material relationships” include material professional advisors, consultants or suppliers. They are also likely to include relationships between the RSE licensee and employer sponsors, parent companies and bodies with the right to nominate potential directors.
- Independence requirements for committees be altered, requiring that the chairman and the majority of the members on the audit and remuneration committees be independent.
- The Chairman of the Board may be the chairman of the remuneration committee.
- The Chairman of the Board not be able to chair the audit committee.
- Regular assessments of the independence of individual Directors be conducted.
- APRA rarely use its power under proposed legislation to determine whether an individual Director is or is not independent.
- The requirement that Boards have formal policies on Board renewal be extended to encompass other aspects of Director appointment and removal, including provisions for the nomination of candidate Directors and the framework used to access the suitability of the candidates.
- Although (c) in the independence definition above prohibits Directors who have been an executive or Director of a body with a material relationship with the licensee from being classed as independent, some independent Directors of the conglomerate group would meet the legislative and SPS 510 requirements and could serve as independent Directors on the Board of the RSE licensee.
Regarding SPG 510, APRA intends to review and extend guidance as to:
- Board size
- Renewal and appointment processes
- Tenure limits
- Management of conflicts of interest (particularly for multiple directorships)
- The role of Board committees.
Parties wishing to comment on APRA’s intentions should provide submissions to the regulator by 31 July 2015.