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Supervision of Pension Systems: Licensing, Pension Funds, and Trustees

This conference focuses on the supervision of pension systems, including the licensing regime for pension funds, licensing standards, and the role of trustees. It will cover the elements of the Australian pension system and the prudential regulation authority's role in maintaining a stable and efficient financial system.

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Supervision of Pension Systems: Licensing, Pension Funds, and Trustees

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  1. Licensing Pension Funds and Trustees Conference on Supervision of Pension Systems Warsaw 17 - 19 September 2006 Ross Jones Deputy Chairman Australian Prudential Regulation Authority

  2. Outline • Elements of the Australian pensions systems • Role of the Australian Prudential Regulation Authority • Licensing regime for pension funds • Licensing standards

  3. Element of the Australian Pension System to 1980s • Safety net age pension introduced 1909 and funded by government tax revenue on a pay as you go basis. Set at 25% average weekly earnings. • Mix of public sector and private sector arrangements. Generally defined benefits schemes supported by employer. Coverage less than 40% of workforce.

  4. Australian Pension Systems 2006 • Safety net age pension. • Compulsory superannuation – employer contribution of 9% of wages or salary preserved until retirement. Coverage more than 90% of workforce. • Voluntary superannuation encouraged by tax concessions generally preserved until retirement.

  5. Australian Pension Systems 2006 • Rapid growth over past 10 years to over US$700 billion. • Most of the funds are defined contributions with members bearing the investment risk. • Employees have the right to choose the fund into which their employer pays the compulsory 9%. • Employees can move their savings from one fund to another.

  6. APRA’s Role • To enforce prudential standards and practices so that under all reasonable circumstances, financial promises made by institutions we supervise are met within a stable, efficient and competitive financial system.

  7. APRA’s Prudential Approach • We follow a risk based approach to pension supervision. • This involves forming a risk assessment of pension funds and setting and implementing supervision strategies based on the risk assessment.

  8. Licensing regime for pension funds • Trustees must meet a fitness and propriety standard. • Trustees must have adequate financial, technical and human resources to conduct operations. • Trustees must develop and implement a risk management framework. • Where trustees outsource material business activities to service providers, an enforceable agreement meeting prescribed conditions must be in place.

  9. Why introduce licences? • Pension funds are now subject to similar requirements as deposit taking institutions and insurance providers, the other prudentially supervised industries. • Pension funds are now subject to prudential standards which govern their financial and risk management performance. • Pension funds are required to have a higher level of transparency and disclosure to members.

  10. Immediate impact of licensing • At commencement of licensing period in July 2004, there were 1100 trustees eligible to apply. • Over the two year licensing period, 325 made applications, 15 subsequently withdrew and one was declined. • Consequently there are now fewer, but larger and more complex pension funds.

  11. Licensing Standards 1: Fitness and Propriety • Applicants must have policies to ensure integrity of persons running the pension fund with regard to skills, training needed, minimum standards of probity and dealing with conflict of interest.

  12. Licensing Standards 2: Outsourcing Requirements • Many Australian funds outsource administration, investment management and custodianship. • All outsourced arrangements must be established via a formal written contract setting out price, delivery, monitoring, rights. • APRA must be given access to all operations of third parties.

  13. Licensing Standards 2: Outsourcing Relationships • Evidence as to why using service providers is in the interest of members rather than in-house provision. • Evidence of how the trustee can terminate the arrangements if service provider performance is inadequate.

  14. Licensing Standards: Public Offer Fund Requirements • The Australian pensions industry structure permits public offer and non-public offer funds. • Public offer funds are permitted to offer superannuation products to any person while non-public offer funds are limited to specific groups. • Trustees of public offer funds face additional risks and are required to hold capital to absorb any potential losses.

  15. Licensing Standards: Risk Management Strategy • Trustees must show material risks facing its operations, how these risks have been rated, and risk mitigation strategies. • Requirement that trustees consider compliance risk, governance risk, outsourcing risk, and risk of theft and fraud.

  16. Where to next? • Need to monitor the undertakings made by trustees with regard to policies and procedures put in place. • Increased interaction with industry advisers such as auditors, actuaries in areas such as the audit of trustee risk management statements and plans. • Further supervisory examination of service providers.

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