Changes to superannuation trustee covenants and obligations: Part 2 of 'Stronger Super'

A law proposed as part of 'Stronger Super' will change the core obligations, and standards expected, of trustees and their directors of a 'registrable superannuation entity'. However, although the new law rearranges some sections relating to SMSF trustees, it doesn't materially affect core obligations of SMSF trustees or their directors.

The Bill[1] represents the second tranche of changes to implement the Government's Stronger Super reforms.

What are the key proposed changes?

The draft Bill proposes:

• to replace the existing trustee covenants in section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which will override a fund's governing rules, to the extent of any inconsistency between them;
• to increase the standard of care, skill and diligence imposed on trustees of a 'registrable superannuation entity' (RSE) (such as a trustee of a corporate, industry or public offer fund — but not of an SMSF, see below) to that of 'a prudent superannuation trustee';
• to impose additional obligations on trustees and directors of corporate trustees of RSEs that provide MySuper products; and
• to give APRA the power to issue prudential standards in relation to superannuation.

You can read the draft Bill here on the Treasury Stronger Super Website.

Application to SMSFs

The proposed new obligations will not apply to trustees of SMSFs. Rather, the existing covenants to be included in the governing rules of SMSFs will continue to apply. However, they will be moved to new sections 52B and 52C with some minor amendments — including an obligation on SMSF trustees to 'review regularly':

• the fund's investment strategy; and
• any strategy in respect of the reserves of the fund.

Trustees of RSEs beware

Trustees of RSEs need to beware that the draft Bill:

• raises the standard of care against which a trustee will be measured from a prudent ordinary person to that of a prudent 'superannuation trustee'; [2] and
• imposes additional obligations on trustees including:
  • to act fairly in dealing with all classes of beneficiaries;
  • to give priority to beneficiaries over others to whom the trustee may have duties; and
  • to prepare, regularly review and give effect to:
    • an insurance strategy;
    • an investment strategy (not only for the whole of the fund, but also for each investment option offered by the trustee); and
    • a risk management strategy.

Additional obligations for directors of corporate trustees of RSEs

The draft Bill expands the application of the obligations under section 52 to also apply to directors of corporate trustees. Consequently, individuals who are directors of corporate trustees will need to ensure that they:

• act honestly;
• exercise the same degree of care, skill and diligence as a prudent superannuation entity director; [3]
• perform their duties in the best interests of the beneficiaries;
• do all things reasonably practicable to avoid conflicts of interest; and
• give priority to the duties and interests of beneficiaries in the event of conflict.

Additional obligations specific to RSEs that offer MySuper products

In addition to the above obligations which apply to RSEs generally, there are a number of new obligations which are specific to MySuper product providers.

These additional obligations include:

• to promote the financial interests of MySuper members — particularly the net returns;
• to annually assess the fund's assets and beneficiaries to ensure there is a sufficient investment scale and that the financial interests of the beneficiaries are not disadvantaged in comparison to the financial interests of beneficiaries from other funds; and
• to include in their investment strategy:
  • - the trustee's annual determination on the sufficiency of the fund; and
  • - the investment return target and appropriate level of risk.

Prudential Standards

The draft Bill gives APRA the power to issue prudential standards for the superannuation industry, including to regulate RSE licensee conduct:

• to protect the interests and meet the reasonable expectations of the beneficiaries of an RSE;
• to keep the RSE in a sound financial position;
• to promote stability in the Australian financial system; and
• in relation to the appointment of auditors and actuaries.

Proposed dates of effect

The additional duties for trustees and directors of corporate trustees of RSEs will apply from 1 July 2013. The provisions in the draft Bill giving APRA the power to make prudential standards will apply from the day after Royal Assent.

More information about Stronger Super

You can read earlier ClearLaw articles giving an overview of the Government's Stronger Super initiative and the first tranche of legislation introduced, see:

• "MySuper" core aspects - draft legislation released, October 2011; and
• "MySuper" Core Provisions: an overview of the new Bill, November 2011.

More Information from Maddocks

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

[1] The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 (Bill).

[2] A 'superannuation trustee' is a person whose profession, business or employment is or includes acting as a trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity.

[3] A 'superannuation entity director' is a person whose profession, business or employment is or includes acting as director of a corporate trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity.