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LEGISLATION

$5 million in assets (sub 36, p. 4 and box 7.1). The trustees of the latter group of funds are comprised of individuals subject only to the disqualified person test and equal representation rules.

Finally, APRA noted that a licensing arrangement would help it identify more satisfactorily the population of active and inactive superannuation entities:

Formal licensing arrangements … have the … practical benefit of allowing the regulator to accurately keep track of the regulated population. Without a clear licensing regime, there is no way of knowing with any certainty which entities are accepting superannuation funds. This poses a significant threat to fund members and needs to be addressed at the earliest opportunity. (sub 36, p. 8)

Box 7.1 Problems in small corporate funds

APRA drew attention to problems relating to 1800 small corporate funds, each having less than $5 million in assets:

Many of these are well managed with active trustee (employer and employee representative) involvement. Nevertheless, … where problems have been detected in the superannuation sector they tend to be concentrated in this area. Where serious problems occur, the financial implications for affected fund members involved can be devastating. Typical problems encountered in these funds include:

• Non-arm’s length transactions and poor investment decisions resulting often in large capital losses. Frequently, problems can flow from a failure to develop and implement a proper investment strategy in accordance with legislation;

• Concentration of assets and inadequate procedures for securing the fund’s interest in holdings;

• Delays in remitting contributions (Superannuation Guarantee, additional employer contributions, voluntary and salary sacrifice contributions);

• Problems with systems capability and capacity; and

• Trustee/directors’ use of fund assets for their own benefit. (sub. 36, pp. 4–5)

The following are three recent examples of small corporate funds which have experienced some of the problems mentioned by APRA.

Example 1: Wes Lofts (Aust) Superannuation Fund

The Wes Lofts (Aust) Superannuation Fund is a corporate fund with about 50 members and total assets of $1.7 million as at 30 June 2001. Of that amount, about $690 000 had been lent back to the employer sponsor or invested in an associated unit trust.

Box 7.1 (continued)

The trustee had also entered into a scheme to reduce artificially the level of the Fund’s in-house assets. APRA took court action against the directors of Wes Lofts Superannuation Pty Ltd, which was the trustee of the fund, for contravening the in- house asset rules within the SIS Act. The rules prohibit a superannuation fund from investing more than 5 per cent of the fund’s assets in an employer sponsor. They are designed to protect members from losing a large part of their retirement savings in the event that the employer fails. The Federal Court issued orders against several of the trustee directors, declaring that they breached the in-house asset rules. One consequence was that the trustee directors became disqualified persons and were thus permanently prohibited from holding the position of superannuation fund trustee, investment manager or custodian. The fund continues to be operational.

Example 2: Corrections Corporation Staff Superannuation Fund

This corporate fund had more than 100 members and assets of less than $5 million. The corporate trustee had shifted its investment strategy towards high risk investments. Members were informed of this change in strategy at the time. The new strategy involved investment of a large proportion of the fund’s assets in a commercial property. The employer sponsor, Corrections Corporation, lost a significant part of its business at the end of 2000. As a result, the corporate trustee had to liquidate most of the fund’s assets to pay out staff who were leaving. The liquidation resulted in the commercial property being sold at a discount on its book value. The realisation of the asset meant that the fund posted a negative return of 23 per cent for the year to December 2000. The fund had been wound up and all member benefits paid out or transferred to other funds. As part of this process, the value of the member benefits was reduced. APRA commissioned a review of the fund by an independent accounting firm to confirm that there were no breaches of the SIS Act. The review found that there was no impropriety or fraud and that the investment strategy had been disclosed to fund members.

Example 3: Fund X

Fund X is a corporate fund with more than 100 members and less than $5 million in assets. APRA had a concern that a contribution received by the corporate trustee on behalf of the employer sponsor, which is part of a group of related companies controlled by company A, was not properly secured by the corporate trustee and, further, that the value of the contribution was smaller than the reported value. The contribution to the fund appears to have been directed by the controlling company of the group, company A, which secured the contribution from another company (company B) within the group. Both the employer sponsor and company B are now subject to liquidation proceedings. It is likely that the liquidator of company B will seek to recover the contribution from the fund. APRA has replaced the corporate trustee and has appointed an inspector to investigate the activities of the fund.

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