ASIC zones in on trustees

by |

ASIC (Australian Securities and Investments Commission) has warned defined benefit superannuation trustees to make timely and appropriate disclosures to members following poor investment returns during the global financial crisis (GFC).

The move comes following a review of disclosure practises during the GFC. ASIC Commissioner Greg Tanzer said the GFC highlighted that, although defined benefit funds are usually less affected by investment markets, prolonged market falls could impact a defined benefit fund if there is a funding shortfall and the employer is unwilling or unable to meet shortfall amounts.

Trustees of defined benefit superannuation funds are required to notify members of significant events and changes in their fund’s financial situation, particularly if there is a funding shortfall that an employer will not rectify.

“A failure to provide existing members with on-going disclosure, where disclosure is required, is an offence,” said Tanzer. “In specific cases, ASIC will consider issuing stop orders on product disclosure statements where it believes there is insufficient disclosure. We will also consider whether further guidance is needed for the industry more broadly.”

ASIC has also recommended that trustees provide information in the PDS about the fund’s financial position and shortfall limit, the effect of market risk on the fund, and any shortfall rectification plan, if appropriate.

The review found that 70% of trustees of funds with a funding shortfall disclosed the shortfall to members in the trustee’s annual report. Most remaining trustees did not disclose their fund’s shortfall on the basis that the employer had agreed to a suitable rectification plan to bring the Vested Benefits Index (VBI) back to above 100%. ASIC paid particular attention to the VBI, as it measures the fund’s financial position.

ASIC’s review of approximately 470 defined benefit funds and sub-funds found that:

  • 58% of these funds’ current or most recent VBI is at 100% or above;
  • 30% reported a VBI between 90-100%;
  • 7% reported a VBI between 80-90%; and
  • 1% reported a VBI of less than 80%.

Draft reporting standards released by the Australian Prudential Regulation Authority (APRA) propose that APRA collect and publish VBI data for defined benefit funds from July 2013 onwards. This could affect the disclosures that trustees choose to make to their members, as they might wish to provide explanations for their financial position to members who would otherwise get the data from APRA. APRA also proposed that trustees set a shortfall limit below which the trustee must arrange for an interim actuarial investigation.