Some industry funds admit holding separate capital reserves

Mike Taylor

Managing Editor/Publisher, Financial Newswire

27 March 2023

Industry superannuation funds have admitted to establishing separate capital reserves to specifically cover the potential liabilities of their trustees.

The practice has been admitted to the Australian Prudential Regulation Authority (APRA) as part of responses to the regulator’s consultation around Strengthening Financial Resilience in Superannuation.

The Australian Institute of Superannuation Trustees (AIST) which represents the bulk of Australia’s industry superannuation funds said that only credible threat to trustees in the profit to member sector is litigation and penalty risk arising from changes to Section 56 of the Superannuation Industry Supervision Act (SIS Act).

Section 56 of the Act deals with the indemnification of trustees from assets of the superannuation entity which essentially precludes use of fund assets to pay for criminal, civil or administration penalties.

“This led many funds in the sector to establish separate trustee capital reserves quarantined from the assets of the fund,” the AIST submission said.

However, in doing so, the AIST said that holding separate reserves in the trustee and fund to meet different liability risks “is an inefficient use of members’ funds so it is logical that a single risk reserve with flexible allowable use be established to meet a range of contingency scenarios”.

“Legal decisions supporting trustee capital reserving made distinctions between trust assets and trustee assets,” the submission said.

“It follows that for a profit-to-member fund to mitigate a CPS 190 event with the Baseline component, the reserve would need to be held within the trustee so as to not trigger a breach of Section 56,” it said.

It argued that, alternately, the Baseline component could be used to fund the capital reserve and in turn be used to meet those liabilities.