By Rachel Alembakis
MELBOURNE — A new regulation forcing superannuation fund trustees to become licensed and comply with stringent and costly prudential standards is opening a new line of business for fund providers.
Most plan sponsors chose to forgo the licensing process and outsource their funds to master trusts, fund managers and consultants.
But some industry observers suggest there is an inherent potential conflict of interest for trustees appointed in outsourcing arrangements in that they are the legal fiduciaries for a superannuation fund and charged with negotiating deals in the fund members' best interests, but also employees of an organization seeking to improve profit. Service providers readily admit they grapple with these issues, but stress that transparency, disclosure and members' interests do come first.
In 2004, the Sydney-based Australian Prudential Regulation Authority, which regulates the superannuation industry, began a two-year process to institute the Registrable Superannuation Entity license. All superannuation funds that have more than five members must have obtained this license by June 30, 2006.
The RSE license has four main categories of requirements: that the trustee is qualified to do the job; that the fund has adequate resources; that agreements with external providers such as investment managers and consultants are made in the interest of members; and that a risk-management plan is created. Superannuation funds could forgo the licensing, but had to prove to the APRA that they made adequate outsourcing arrangements by June 30.
When the licensing process started, there were 1,200 trustees operating around 9,000 funds, according to the APRA. By the end of June, 307 licenses were granted, meaning more than 75% of fund trustees decided to completely outsource their fund, from the trustee's fiduciary responsibility to investment management to administration.
The licensing process was time-consuming: Superannuation fund trustees must have had their license applications accepted and thoroughly vetted by APRA before the license was granted, and APRA officials stated that not one application was without errors on the first submission. It also was costly. For example, superannuation funds that are permitted to offer products to the public, the application fee was A$20,000 (US$15,320).
"The legislation and complexity of superannuation funs have grown," said Russell Mason, worldwide partner at Mercer Human Resource Consulting Pty. Ltd. in Sydney. "It's the costs of compliance and regulation that have been the trigger to force companies to say the costs are disproportionate."