This disclosure from APRA came about after inquiry by Andrew Bragg, a New South Wales Liberal Senator, during a session of Senate Estimates. APRA emphasized that these arrangements typically manifest through what is known as premium adjustment mechanisms (PAMs).
According to APRA, "PAMs are profit sharing arrangements that have a framework/policy on how favorable claims experience is applied, for example, to keep member premiums more stable." This mechanism essentially allows super funds to potentially offer steady or reduced premiums to their members when claims are lower than anticipated.
APRA detailed that while these financial strategies are legal, trustees must ensure that the arrangements do not create conflicts of interest and that they remain focused on the welfare of the members. Importantly, APRA assured that it would intervene if it suspected any such issues.
Underlining the regulatory framework, APRA referred to the Prudential Standard SPS 250 Insurance in Superannuation. Trustees are mandated to engage insurers on terms that reflect arm's length transactions and are aligned with the financial interests of the beneficiaries. APRA articulated, "Trustees must ensure that the engagement of the insurer is at arm’s length and in the best financial interests of beneficiaries, and they must consider how they would apply their conflicts management framework to any conflicts that may arise from an insurance arrangement."
Furthermore, the Superannuation Industry (Supervision) Act 1993 reinforces these regulations by insisting trustees act in the best financial interest of beneficiaries while zealously pursuing insurance claims that are deemed feasible.
APRA stressed that if it ever harbored concerns regarding a trustee’s compliance with these standards due to profit-sharing schemes, it wouldn’t "hesitate to probe entities in relation to the concerns and, if necessary, take any necessary action using the tools and powers available to us."
It's evident that APRA is intent on monitoring this landscape closely, ensuring that any profit-sharing deals do not compromise the fiduciary responsibilities trustees owe their members. Originally published by Mike Taylor, Superannuation insights unravel more about how such arrangements impact the sector significantly.
