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Prudential Standard LPS 600

Statutory Funds

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Authority

1. This Prudential Standard is made under section 230A(1)(a) of the Life Insurance Act 1995 (the Act).

Application of this Prudential Standard

2. This Prudential Standard applies to all life companies other than friendly societies registered under the Act.[1]

3. A life company must comply with this Prudential Standard from 1 July 2011.

Restructure of statutory funds

Application for restructure of statutory funds

4. Restructure of statutory funds are subject to the requirements set out in section 52 of the Act and in this Prudential Standard.

5. An application for a restructure of a benefit fund under section 52 of the Act must:

(a) be made using the “Form 1” to this Prudential Standard; and

(b) be accompanied by the documents mentioned in “Schedule 1” to Form 1 and be lodged with APRA at least 30 days before the proposed date of restructure.

6. The applicant must, on request by APRA and within the time specified, produce to APRA:

(a) a report by an independent actuary (being an actuary, other than the Appointed Actuary, who is approved by APRA in writing to perform duties as required by APRA and paid for by the life company for the purposes of this Prudential Standard) including statements on the same matters as those required of the appointed actuary; and/or

(b) documents that are provided to policy owners or prospective policy owners of the company that contain details of the terms and conditions of:

(i) policies of the kind that will remain referable to the transferring fund; and

(ii) policies of the kind that will become referable to the receiving fund.

Approval of application for restructure of statutory funds

7. Subject to this Prudential Standard, APRA may approve an application by a life company for a restructure of its statutory funds.

8. APRA may refuse to approve an application by a life company for a restructure of its statutory fund or funds if it considers that immediately after the restructure:

(a) a transferring fund; or

(b) a receiving fund

will not satisfy the capital adequacy standard applicable to it under the Act.

Identification of policies

9. Before a restructure has effect, a life company must make a written determination identifying the policies referable to a transferring fund that are to be referable to a receiving fund.

Transfer of assets

10. A life company shall transfer assets from a transferring fund to a receiving fund as soon as practicable after the transfer of liabilities from the transferring fund to the receiving fund.

11. Assets that are transferred from a transferring fund to a receiving fund shall be treated as assets of a receiving fund on and from the date the restructure has effect.

12. The nature and value of assets to be transferred from a transferring fund to a receiving fund is to be determined by the appointed actuary using a method that:

(a) places a value on the liabilities that is consistent with the value being adopted for the assets; and

(b) considers the nature and value of the assets in aggregate and also in respect of each particular class of assets; and

(c) in view of the nature of the liabilities to be transferred to a receiving fund and those to remain in a transferring fund, has the objectives of:

(i) facilitating the proper operation of the transferring fund and the receiving fund; and

(ii) protecting the interests of the owners of the policies referable to the transferring fund and the receiving fund; and

(d) is consistent with the method that was described in the appointed actuary’s report that:

(i) was lodged with APRA in relation to the application in accordance with Schedule 1 of Form 1; and

(ii) was approved by APRA as part of its approval under paragraph 7.

When restructure has effect

13. The restructure of statutory funds of a life company shall have effect when:

(a) policies that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(b) policy and other liabilities that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(c) assets that, immediately before the restructure, were assets of a transferring fund become assets of a receiving fund

to the extent specified in documents supporting an application under paragraph 5 provided to APRA.

Notification of interested persons

14. A life company that restructures a statutory fund must, within 6 weeks of the restructure having effect, give written notice of the restructure of the fund to the owner of every policy referable to any of the funds involved in the restructure.

15. A notice under paragraph 14 must set out the following matters:

(a) the name and identifying details of the funds involved in the restructure;

(b) the date of the restructure;

(c) the identifying details of each policy owner’s policy that is referable to either the transferring fund or the receiving fund;

(d) where the benefits under the policy are to be provided out of more than one statutory fund:

(i) the benefits under the policy that are to be provided out of each fund; and

(ii) either the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund or the way in which that proportion is to be calculated.

16. A notice under paragraph 14 must be accompanied by:

(a) a document describing (in summary form) the reasons for the restructure and containing relevant extracts from any report by the appointed actuary on the proposed restructure under item 2 of Schedule 1 to Form 1 which deal with implications for policy owners; and

(b) a revision to the policy document by way of endorsement or written notice setting out matters in paragraphs 15(a) and 15(b) of this Prudential Standard.

Information to be lodged with APRA following the restructure

17. If a restructure of statutory funds involves the establishment of a new statutory fund (the ‘receiving fund’), the life company must give to APRA, within 6 weeks after the establishment of the receiving fund, a written notice setting out the following:

(a) the nature and terms of the establishment of the receiving fund; and

(b) the nature and value of assets transferred from a transferring fund to the receiving fund; and

(c) the kinds of policies that are referable to the receiving fund.

18. The notice referred to in paragraph 17 must be accompanied by statements that the receiving fund has been established in accordance with section 52 of the Act, certified by:

(a) the principal executive officer; and

(b) the appointed actuary; and

(c) the auditor.

Operational requirements

Consequences of transfer of policy between statutory funds

19. For the purposes of subsections 55(2) and (3) of the Act, the part of the liabilities (including policy liabilities) of the company, mentioned in subsection 55(2) of the Act, must be ascertained in a manner which, in the opinion of the appointed actuary, will not result in unfairness to the owners of the policies that remain referable to a fund or to the owners of the policies that cease to be referable to that fund (particularly having regard to the nature of the assets to be transferred).

20. A notice mentioned in subsection 55(3) of the Act must:

(a) be in writing; and

(b) set out:

(i) the identifying details of the policy; and

(ii) the identity of all the statutory funds to which the policy is or has become referable; and

(iii) the identity of all the statutory funds to which the policy has ceased to be referable; and

(iv) the date on which the policy became referable to the fund or funds to which it has become referable; and

(v) where the policy is referable to 2 or more statutory funds:

(A) the benefits under the policy that are to be provided out of each fund; and

(B) either:

1. the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund; or
2. the way in which that proportion is to be calculated; and

(c) be given to the policy owner within 6 weeks after the occurrence of whichever of the circumstances described in paragraphs 55(3)(a) and 55(3)(b) of the Act is applicable.

Single bank account for statutory funds

21. For the purposes of subsection 34(4) of the Act, the bank account must be maintained in accordance with the following standards:

(a) A statutory fund account must be established in the records of the life company in respect of each statutory fund in respect of which the bank account is maintained.

(b) The statutory fund account must be a current account (or ledger) that records, as accounting entries, drawings from and receipts by the bank account in respect of the statutory fund.

(c) The drawings and receipts must be balanced by offsetting entries in both the bank account and the statutory fund account.

(d) The balancing must be carried out not less frequently than once every 7 days, except that:

(i) in the case of drawings or receipts relating to investment-linked contracts, the balancing must be carried out not less frequently than the frequency at which the unit prices relevant to the contract concerned are quoted by the person managing the unitised investment concerned, and in any event not less frequently than once every 7 days;

(ii) in the case of drawings or receipts of amounts that are less than or equal to the greater of:

(A) $500,000; or

(B) 1% of the value of the assets of the statutory fund as last reported to APRA; the balancing may be carried out not less frequently than once every 28 days.

(e) A debit balance in the statutory fund account must be recorded as a “sundry debtor”, and a credit balance as a “sundry creditor”.

(f) Interest must accrue daily on any balance (whether credit or debit) in the statutory fund account, at a rate that the company believes, on reasonable grounds, is fair and reasonable to the policyholders whose policies are referable to the statutory fund having regard to the interest earned by the bank account.

(g) The net position of all the statutory fund accounts in aggregate must be reconciled not less frequently than once every 28 days. When so reconciled the net position must be equal to the balance of the bank account at that time.

(h) If, at any time, the balance (whether credit or debit) in a statutory fund account comes to exceed the greater of:

(i) $500,000; or

(ii) 1% of the value of the assets of the statutory fund as last reported to APRA;

the company must, in writing, within 28 days after that time, tell APRA and give APRA particulars of the transactions that caused the balance to exceed the applicable amount.

Non-participating benefits

22. For the purposes of subsection 15(3) of the Act, the following benefits, as specified in paragraphs 23-28, are non-participating benefits:

Policies insuring multiple lives with limited form of profit sharing

23. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy that does not have any investment component;

(b) a group of 2 or more people are insured by the policy against the same contingencies;

(c) the benefit has the features mentioned in paragraph 15(2)(b) of the Act;

(d) the benefit includes an entitlement to share in a distribution by the life company of profits or surplus, but only by way of repayment of premiums previously paid or reduction of future premiums;

(e) the amount of the entitlement is determined by reference to the history of claims made under one or both of the following:

(i) the policy;

(ii) policies of the same kind as the policy.

Investment-linked contracts

24. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment-linked benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Investment account contracts

25. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the interest payable on the account is dependent on, or to be ascertained according to, a decision of the company:

(i) the benefit is provided for by a policy that belongs to a particular subcategory of life insurance business; and

(ii) no other kind of policy is contained within that subcategory; and

(iii) the net investment earnings (including realised and unrealised gains) of the assets administered for the purposes of that subcategory are credited to the policies belonging to that subcategory; and

(iv) the aggregate value of the accounts under the policies belonging to that subcategory does not, and will not at any time, exceed 103% of the value of the assets administered for the purposes of that subcategory; and

(v) the aggregate value of those accounts does not, and will not at any time, fall below 95% of the value of the assets administered for the purposes of that subcategory;

(e) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount – do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(f) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or more of the following:

(i) the interest payable on the account;

(ii) the charges payable under the policy;

(iii) the surrender value of the policy;

(g) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies other than investment-linked or investment account contracts

26. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is not an investment-linked benefit or an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or both of the following:

(i) the charges payable under the policy;

(ii) the surrender value of the policy;

(f) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies providing rolling fixed rates for fixed terms

27. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(b) the policy:

(i) provides for a benefit in respect of each of 2 or more consecutive specified periods occurring during the term of the policy; and

(ii) provides that the benefit in respect of each of the specified periods is to be determined at or before the commencement of the period; and

(iii) gives the policyholder the option, at or before the end of each of the specified periods that end before the expiry of the term of the policy, to surrender the policy; and

(iv) does not provide for any benefits other than those mentioned in subparagraph (i);

(c) if the benefit in respect of each of the specified periods were the only benefit provided for by the policy, that benefit would be a non-participating benefit by virtue of:

(i) subsection 15(2) of the Act; or

(ii) this Prudential Standard;

(d) the circumstances in which and the conditions subject to which the company may make a determination mentioned in subparagraph (b)(ii) are set out in the policy document.

Transitional

28. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy issued by the life company before 1 January 1996;

(b) the policy is a kind of policy which the company had available for issue on 30 June 1995 (in circumstances where all pre-conditions under the Life Insurance Act 1945 to the issuing of that kind of policy were satisfied);

(c) if the policy had been issued at the end of 30 June 1995, it would not have been a participating policy within the meaning of the Life Insurance Act 1945 (as then in force).

Note: To avoid doubt, in this standard “charges” includes fees.

Starting Amount

29. For the purposes of subsection 61(1) of the Act:

Interpretation – general

30. The definitions in paragraphs 31 to 38 apply for the purposes of this Prudential Standard.

Meaning of “starting date”

31. The “starting date” is the first day of the life company’s first financial year ending on or after 31 December 1996.

Meaning of “preceding financial year”

32. The “preceding financial year” is the life company’s financial year ending immediately before the starting date.

Meaning of “transitional actuarial standard”

33. The “transitional actuarial standard” is the Actuarial Standard for Valuation of Policy Liabilities which is contained in the set of actuarial standards entitled “Transitional Provisions for the Valuation of Policy Liabilities, Solvency and Capital Adequacy Standards and Calculation of Paid Up Values and Surrender Values” issued June 1995 by the Life Insurance Actuarial Standards Board.

Meaning of “aggregate retained profits”

34. The “aggregate retained profits” of a category of business of a statutory fund is an amount worked out in accordance with the following formula:

net assets of category  policy liabilities of category

where:

“net assets of category” means the net assets of the category determined in accordance with paragraph 35;

“policy liabilities of category” means the policy liabilities of the category as at the starting date determined in accordance with actuarial standard AS1.01 issued October 1996 by the Life Insurance Actuarial Standards Board.

Meaning of “net assets” in paragraph 34

35. For the purposes of paragraph 34, the “net assets” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the assets and liabilities of the category as at the end of the preceding financial year - an amount worked out in accordance with the following formula:

assets of category  liabilities of category  shareholders’ capital of category

where:

“assets of category” means the value of the assets of the category as at the end of the preceding financial year;

“liabilities of category” means the liabilities of the category, other than the policy liabilities of the category determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“shareholders’ capital of category” means the shareholders’ capital of the category determined in accordance with paragraph 37;

(b) in every other case - an amount worked out in accordance with the following formula:

(assets of fund  liabilities of fund  aggregate shareholders’ capital of fund)

 (transitional actuarial standard policy liabilities of category  transitional actuarial standard policy liabilities of fund)

where:

“assets of fund” means the value of the assets of the statutory fund as at the end of the preceding financial year;

“liabilities of fund” means the liabilities of the statutory fund, other than the policy liabilities of the statutory fund determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“aggregate shareholders’ capital of fund” means the aggregate shareholders’ capital of the statutory fund as at the end of the preceding financial year determined in accordance with paragraph 36;

“transitional actuarial standard policy liabilities of category” means the policy liabilities of the category as at the end of the preceding financial year determined in accordance with the transitional actuarial standard;

“transitional actuarial standard policy liabilities of fund” means the policy liabilities of the statutory fund as at the end of the preceding financial year determined in accordance with the transitional actuarial standard.

Meaning of “aggregate shareholders’ capital”

36. The “aggregate shareholders’ capital” of a statutory fund is the sum of the shareholders’ capital of each category of business of the statutory fund determined in accordance with paragraph 37.

Meaning of “shareholders’ capital” in paragraphs 35 and 36

37. For the purposes of paragraphs 35 and 36, the “shareholders’ capital” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the shareholders’ capital of the category as at the end of the preceding financial year – the shareholders’ capital of the category as at the end of the preceding financial year;

(b) in every other case - nil.

Meaning of “IFRS[2] change in net assets of a category of business”

38. The “IFRS change in net assets of a category of business” means the difference between:

(a) the amount that would have been reported as Life Insurance Act Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 had the version of those Prudential Rules (and the relevant Actuarial Standards) that apply to reporting periods commencing on or after 1 January 2005 applied at that date; and

(b) the amount that was reported as Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 under the version of those Prudential Rules (and the relevant Actuarial Standards) that applied at that date.

Starting amount for Australian policy owners’ retained profits

39. For the purposes of the definition of “Australian policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2.

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as:

(A) the life company determines; and

(B) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of those aggregate retained profits; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) Such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as

(i) the life company determines; and

(ii) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of the IFRS change in net assets of that category of business; and

(b) An amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for Australian policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for overseas policy owners’ retained profits

40. For the purposes of the definition of “overseas policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing overseas participating business as:

(A) the life company determines; and

(B) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(C) is not less than the amount of profits that is required to be allocated to overseas policy owners’ retained profits by:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as:

(i) the life company determines; and

(ii) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(iii) is not less than the amount of profit (represented by the change in net assets) that is required to be allocated to overseas policy owners’ retained profits by:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for overseas policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ retained profits (Australian participating)

41. For the purposes of the definition of “shareholders’ retained profits (Australian participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as is not allocated to the starting amount for Australian policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) 25% of the initial starting amount for Australian policy owners’ retained profits determined in accordance with this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as is not applied to increase the initial starting amount for Australian policy owner’ retained profits in accordance with this Prudential Standard; and

(b) an amount such that after applying the IFRS starting amount adjustment, the shareholders’ retained profits (Australian participating) of the statutory fund are equal to 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund (after the IFRS starting amount adjustment applied in accordance with this Prudential Standard).

Starting amount for shareholders’ retained profits (overseas and non-participating)

42. For the purposes of the definition of “shareholders’ retained profits (overseas and non- participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business as:

(i) the life company determines; and

(ii) is not allocated to retained profits under Part 1 of paragraphs 39 to 41; and

(b) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) the sum of:

(i) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as is not applied to increase the initial starting amount for overseas policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) the IFRS change in net assets of the category of business of the statutory fund representing non-participating business; and

(b) an amount that

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for shareholders’ retained profits (overseas and non-participating), as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ capital

43. For the purposes of the definition of “shareholders’ capital” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) the aggregate shareholders’ capital of the statutory fund; and

(b) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business or non-participating business as is not allocated to retained profits under Part 1 of paragraph 39 to 42.

Part 2

The IFRS starting amount adjustment is:

(a) the remaining balance of the IFRS change in net assets of each category of business of the statutory fund as is not applied to vary any of the other initial starting amounts under Part 2 of paragraphs 39 to 42.

Aggregate retained profits not to be allocated more than once

44. To avoid doubt, the sum of the amounts of aggregate retained profits of a category of business that are allocated to the initial starting amounts mentioned in Part 1 of paragraphs 39 to 43 must not exceed the total aggregate retained profits of the category.

Aggregate of IFRS starting amount adjustments

45. To avoid doubt, the sum of the IFRS starting amount adjustments under Part 2 of paragraphs 39 to 43 must equal the IFRS change in net assets of the statutory fund.

Distribution of Shareholders’ Retained Profits (Australian Participating)

46. For the purposes of subsection 62(5) of the Act, the distribution of shareholders’ retained profits (Australian participating) from a statutory fund is prohibited if:

(a) there is not, at the same time, a distribution of Australian policy owners’ retained profits from the statutory fund; and

(b) immediately after the distribution, the shareholders’ retained profits (Australian participating) of the statutory fund that remain undistributed are less than 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund that remain undistributed.

Unsecured borrowings of a statutory fund

47. For the purposes of subsection 38(4) of the Act, a life company must not borrow money by means of unsecured borrowing, for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.

where “free assets”, in relation to a statutory fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.

Form 1: Restructure of Statutory Funds

1. Name and Australian Business Number of life company

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2. Date from which the restructure is proposed to have effect

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3. Required documentation

By indicating “Yes” below, the signatory to this form confirms that the documents mentioned in Schedule 1 to this form have been attached.

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4. Contact person

Please provide the contact details for the person to whom enquiries relating to this application should be directed.

Name

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Position title

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Phone

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Email address

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5. Address for correspondence

Please provide the address to which correspondence relating to this application should be mailed.

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6. Signatures

This form must be signed by:

(a) the principal executive officer of the life company; or

(b) an officer of the life company who has been authorised for that purpose by the principal executive officer, if the principal executive officer has notified APRA in writing of the authorisation.

Name Position title

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Signature Date

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Please send completed form and accompanying documents to your responsible supervisor.
Schedule 1 to Form 1

Specified documents required to be lodged with Form 1

1. A statement of the nature of the receiving fund and the terms and conditions on which the restructure is to take place. The statement must include the following information:

(a) the identity of a transferring fund and a receiving fund; and

(b) the classes of life insurance business to be carried on by the company within the receiving fund; and

(c) the categories of life insurance business to be carried on by the company within each of those classes; and

(d) the sub-categories of life insurance business to be carried on by the company within each of those categories; and

(e) the kinds of policies within those categories and sub-categories and, where the policies are referable to more than one fund, the benefits to be written by the company within those categories and sub-categories; and

(f) the value of the policy liabilities to be transferred to the receiving fund, by kinds of policies; and

(g) the value of the policy liabilities to remain in the transferring fund, by kinds of policies; and

(h) the value of other liabilities (not being policy liabilities) to be transferred to the receiving fund; and

(i) the value of other liabilities (not being policy liabilities) to remain in the transferring fund; and

(j) the value of the assets to be transferred to the receiving fund, by asset class; and

(k) the value of the assets to remain in the transferring fund, by asset class; and

(l) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to be transferred to the receiving fund; and

(m) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to remain in the transferring fund.

2. A report by the appointed actuary on the proposed restructure, including:

(a) statement setting out the basis on which the nature and value of the assets to be transferred is to be determined; and

(b) statement as to whether the assets to be transferred are appropriate to the liabilities to be transferred; and

(c) statement as to whether the restructure will result in unfairness to the owners of the policies referable to any of the funds involved in the restructure; and

(d) statement as to whether, immediately after the restructure, a transferring fund and receiving fund will satisfy the solvency standard and the capital adequacy standard applicable to it under the Act.

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Prudential Standard LPS 600

Statutory Funds

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Authority

1. This Prudential Standard is made under section 230A(1)(a) of the Life Insurance Act 1995 (the Act).

Application of this Prudential Standard

2. This Prudential Standard applies to all life companies other than friendly societies registered under the Act.[1]

3. A life company must comply with this Prudential Standard from 1 July 2011.

Restructure of statutory funds

Application for restructure of statutory funds

4. Restructure of statutory funds are subject to the requirements set out in section 52 of the Act and in this Prudential Standard.

5. An application for a restructure of a benefit fund under section 52 of the Act must:

(a) be made using the “Form 1” to this Prudential Standard; and

(b) be accompanied by the documents mentioned in “Schedule 1” to Form 1 and be lodged with APRA at least 30 days before the proposed date of restructure.

6. The applicant must, on request by APRA and within the time specified, produce to APRA:

(a) a report by an independent actuary (being an actuary, other than the Appointed Actuary, who is approved by APRA in writing to perform duties as required by APRA and paid for by the life company for the purposes of this Prudential Standard) including statements on the same matters as those required of the appointed actuary; and/or

(b) documents that are provided to policy owners or prospective policy owners of the company that contain details of the terms and conditions of:

(i) policies of the kind that will remain referable to the transferring fund; and

(ii) policies of the kind that will become referable to the receiving fund.

Approval of application for restructure of statutory funds

7. Subject to this Prudential Standard, APRA may approve an application by a life company for a restructure of its statutory funds.

8. APRA may refuse to approve an application by a life company for a restructure of its statutory fund or funds if it considers that immediately after the restructure:

(a) a transferring fund; or

(b) a receiving fund

will not satisfy the capital adequacy standard applicable to it under the Act.

Identification of policies

9. Before a restructure has effect, a life company must make a written determination identifying the policies referable to a transferring fund that are to be referable to a receiving fund.

Transfer of assets

10. A life company shall transfer assets from a transferring fund to a receiving fund as soon as practicable after the transfer of liabilities from the transferring fund to the receiving fund.

11. Assets that are transferred from a transferring fund to a receiving fund shall be treated as assets of a receiving fund on and from the date the restructure has effect.

12. The nature and value of assets to be transferred from a transferring fund to a receiving fund is to be determined by the appointed actuary using a method that:

(a) places a value on the liabilities that is consistent with the value being adopted for the assets; and

(b) considers the nature and value of the assets in aggregate and also in respect of each particular class of assets; and

(c) in view of the nature of the liabilities to be transferred to a receiving fund and those to remain in a transferring fund, has the objectives of:

(i) facilitating the proper operation of the transferring fund and the receiving fund; and

(ii) protecting the interests of the owners of the policies referable to the transferring fund and the receiving fund; and

(d) is consistent with the method that was described in the appointed actuary’s report that:

(i) was lodged with APRA in relation to the application in accordance with Schedule 1 of Form 1; and

(ii) was approved by APRA as part of its approval under paragraph 7.

When restructure has effect

13. The restructure of statutory funds of a life company shall have effect when:

(a) policies that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(b) policy and other liabilities that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(c) assets that, immediately before the restructure, were assets of a transferring fund become assets of a receiving fund

to the extent specified in documents supporting an application under paragraph 5 provided to APRA.

Notification of interested persons

14. A life company that restructures a statutory fund must, within 6 weeks of the restructure having effect, give written notice of the restructure of the fund to the owner of every policy referable to any of the funds involved in the restructure.

15. A notice under paragraph 14 must set out the following matters:

(a) the name and identifying details of the funds involved in the restructure;

(b) the date of the restructure;

(c) the identifying details of each policy owner’s policy that is referable to either the transferring fund or the receiving fund;

(d) where the benefits under the policy are to be provided out of more than one statutory fund:

(i) the benefits under the policy that are to be provided out of each fund; and

(ii) either the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund or the way in which that proportion is to be calculated.

16. A notice under paragraph 14 must be accompanied by:

(a) a document describing (in summary form) the reasons for the restructure and containing relevant extracts from any report by the appointed actuary on the proposed restructure under item 2 of Schedule 1 to Form 1 which deal with implications for policy owners; and

(b) a revision to the policy document by way of endorsement or written notice setting out matters in paragraphs 15(a) and 15(b) of this Prudential Standard.

Information to be lodged with APRA following the restructure

17. If a restructure of statutory funds involves the establishment of a new statutory fund (the ‘receiving fund’), the life company must give to APRA, within 6 weeks after the establishment of the receiving fund, a written notice setting out the following:

(a) the nature and terms of the establishment of the receiving fund; and

(b) the nature and value of assets transferred from a transferring fund to the receiving fund; and

(c) the kinds of policies that are referable to the receiving fund.

18. The notice referred to in paragraph 17 must be accompanied by statements that the receiving fund has been established in accordance with section 52 of the Act, certified by:

(a) the principal executive officer; and

(b) the appointed actuary; and

(c) the auditor.

Operational requirements

Consequences of transfer of policy between statutory funds

19. For the purposes of subsections 55(2) and (3) of the Act, the part of the liabilities (including policy liabilities) of the company, mentioned in subsection 55(2) of the Act, must be ascertained in a manner which, in the opinion of the appointed actuary, will not result in unfairness to the owners of the policies that remain referable to a fund or to the owners of the policies that cease to be referable to that fund (particularly having regard to the nature of the assets to be transferred).

20. A notice mentioned in subsection 55(3) of the Act must:

(a) be in writing; and

(b) set out:

(i) the identifying details of the policy; and

(ii) the identity of all the statutory funds to which the policy is or has become referable; and

(iii) the identity of all the statutory funds to which the policy has ceased to be referable; and

(iv) the date on which the policy became referable to the fund or funds to which it has become referable; and

(v) where the policy is referable to 2 or more statutory funds:

(A) the benefits under the policy that are to be provided out of each fund; and

(B) either:

1. the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund; or
2. the way in which that proportion is to be calculated; and

(c) be given to the policy owner within 6 weeks after the occurrence of whichever of the circumstances described in paragraphs 55(3)(a) and 55(3)(b) of the Act is applicable.

Single bank account for statutory funds

21. For the purposes of subsection 34(4) of the Act, the bank account must be maintained in accordance with the following standards:

(a) A statutory fund account must be established in the records of the life company in respect of each statutory fund in respect of which the bank account is maintained.

(b) The statutory fund account must be a current account (or ledger) that records, as accounting entries, drawings from and receipts by the bank account in respect of the statutory fund.

(c) The drawings and receipts must be balanced by offsetting entries in both the bank account and the statutory fund account.

(d) The balancing must be carried out not less frequently than once every 7 days, except that:

(i) in the case of drawings or receipts relating to investment-linked contracts, the balancing must be carried out not less frequently than the frequency at which the unit prices relevant to the contract concerned are quoted by the person managing the unitised investment concerned, and in any event not less frequently than once every 7 days;

(ii) in the case of drawings or receipts of amounts that are less than or equal to the greater of:

(A) $500,000; or

(B) 1% of the value of the assets of the statutory fund as last reported to APRA; the balancing may be carried out not less frequently than once every 28 days.

(e) A debit balance in the statutory fund account must be recorded as a “sundry debtor”, and a credit balance as a “sundry creditor”.

(f) Interest must accrue daily on any balance (whether credit or debit) in the statutory fund account, at a rate that the company believes, on reasonable grounds, is fair and reasonable to the policyholders whose policies are referable to the statutory fund having regard to the interest earned by the bank account.

(g) The net position of all the statutory fund accounts in aggregate must be reconciled not less frequently than once every 28 days. When so reconciled the net position must be equal to the balance of the bank account at that time.

(h) If, at any time, the balance (whether credit or debit) in a statutory fund account comes to exceed the greater of:

(i) $500,000; or

(ii) 1% of the value of the assets of the statutory fund as last reported to APRA;

the company must, in writing, within 28 days after that time, tell APRA and give APRA particulars of the transactions that caused the balance to exceed the applicable amount.

Non-participating benefits

22. For the purposes of subsection 15(3) of the Act, the following benefits, as specified in paragraphs 23-28, are non-participating benefits:

Policies insuring multiple lives with limited form of profit sharing

23. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy that does not have any investment component;

(b) a group of 2 or more people are insured by the policy against the same contingencies;

(c) the benefit has the features mentioned in paragraph 15(2)(b) of the Act;

(d) the benefit includes an entitlement to share in a distribution by the life company of profits or surplus, but only by way of repayment of premiums previously paid or reduction of future premiums;

(e) the amount of the entitlement is determined by reference to the history of claims made under one or both of the following:

(i) the policy;

(ii) policies of the same kind as the policy.

Investment-linked contracts

24. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment-linked benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Investment account contracts

25. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the interest payable on the account is dependent on, or to be ascertained according to, a decision of the company:

(i) the benefit is provided for by a policy that belongs to a particular subcategory of life insurance business; and

(ii) no other kind of policy is contained within that subcategory; and

(iii) the net investment earnings (including realised and unrealised gains) of the assets administered for the purposes of that subcategory are credited to the policies belonging to that subcategory; and

(iv) the aggregate value of the accounts under the policies belonging to that subcategory does not, and will not at any time, exceed 103% of the value of the assets administered for the purposes of that subcategory; and

(v) the aggregate value of those accounts does not, and will not at any time, fall below 95% of the value of the assets administered for the purposes of that subcategory;

(e) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount – do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(f) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or more of the following:

(i) the interest payable on the account;

(ii) the charges payable under the policy;

(iii) the surrender value of the policy;

(g) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies other than investment-linked or investment account contracts

26. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is not an investment-linked benefit or an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or both of the following:

(i) the charges payable under the policy;

(ii) the surrender value of the policy;

(f) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies providing rolling fixed rates for fixed terms

27. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(b) the policy:

(i) provides for a benefit in respect of each of 2 or more consecutive specified periods occurring during the term of the policy; and

(ii) provides that the benefit in respect of each of the specified periods is to be determined at or before the commencement of the period; and

(iii) gives the policyholder the option, at or before the end of each of the specified periods that end before the expiry of the term of the policy, to surrender the policy; and

(iv) does not provide for any benefits other than those mentioned in subparagraph (i);

(c) if the benefit in respect of each of the specified periods were the only benefit provided for by the policy, that benefit would be a non-participating benefit by virtue of:

(i) subsection 15(2) of the Act; or

(ii) this Prudential Standard;

(d) the circumstances in which and the conditions subject to which the company may make a determination mentioned in subparagraph (b)(ii) are set out in the policy document.

Transitional

28. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy issued by the life company before 1 January 1996;

(b) the policy is a kind of policy which the company had available for issue on 30 June 1995 (in circumstances where all pre-conditions under the Life Insurance Act 1945 to the issuing of that kind of policy were satisfied);

(c) if the policy had been issued at the end of 30 June 1995, it would not have been a participating policy within the meaning of the Life Insurance Act 1945 (as then in force).

Note: To avoid doubt, in this standard “charges” includes fees.

Starting Amount

29. For the purposes of subsection 61(1) of the Act:

Interpretation – general

30. The definitions in paragraphs 31 to 38 apply for the purposes of this Prudential Standard.

Meaning of “starting date”

31. The “starting date” is the first day of the life company’s first financial year ending on or after 31 December 1996.

Meaning of “preceding financial year”

32. The “preceding financial year” is the life company’s financial year ending immediately before the starting date.

Meaning of “transitional actuarial standard”

33. The “transitional actuarial standard” is the Actuarial Standard for Valuation of Policy Liabilities which is contained in the set of actuarial standards entitled “Transitional Provisions for the Valuation of Policy Liabilities, Solvency and Capital Adequacy Standards and Calculation of Paid Up Values and Surrender Values” issued June 1995 by the Life Insurance Actuarial Standards Board.

Meaning of “aggregate retained profits”

34. The “aggregate retained profits” of a category of business of a statutory fund is an amount worked out in accordance with the following formula:

net assets of category  policy liabilities of category

where:

“net assets of category” means the net assets of the category determined in accordance with paragraph 35;

“policy liabilities of category” means the policy liabilities of the category as at the starting date determined in accordance with actuarial standard AS1.01 issued October 1996 by the Life Insurance Actuarial Standards Board.

Meaning of “net assets” in paragraph 34

35. For the purposes of paragraph 34, the “net assets” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the assets and liabilities of the category as at the end of the preceding financial year - an amount worked out in accordance with the following formula:

assets of category  liabilities of category  shareholders’ capital of category

where:

“assets of category” means the value of the assets of the category as at the end of the preceding financial year;

“liabilities of category” means the liabilities of the category, other than the policy liabilities of the category determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“shareholders’ capital of category” means the shareholders’ capital of the category determined in accordance with paragraph 37;

(b) in every other case - an amount worked out in accordance with the following formula:

(assets of fund  liabilities of fund  aggregate shareholders’ capital of fund)

 (transitional actuarial standard policy liabilities of category  transitional actuarial standard policy liabilities of fund)

where:

“assets of fund” means the value of the assets of the statutory fund as at the end of the preceding financial year;

“liabilities of fund” means the liabilities of the statutory fund, other than the policy liabilities of the statutory fund determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“aggregate shareholders’ capital of fund” means the aggregate shareholders’ capital of the statutory fund as at the end of the preceding financial year determined in accordance with paragraph 36;

“transitional actuarial standard policy liabilities of category” means the policy liabilities of the category as at the end of the preceding financial year determined in accordance with the transitional actuarial standard;

“transitional actuarial standard policy liabilities of fund” means the policy liabilities of the statutory fund as at the end of the preceding financial year determined in accordance with the transitional actuarial standard.

Meaning of “aggregate shareholders’ capital”

36. The “aggregate shareholders’ capital” of a statutory fund is the sum of the shareholders’ capital of each category of business of the statutory fund determined in accordance with paragraph 37.

Meaning of “shareholders’ capital” in paragraphs 35 and 36

37. For the purposes of paragraphs 35 and 36, the “shareholders’ capital” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the shareholders’ capital of the category as at the end of the preceding financial year – the shareholders’ capital of the category as at the end of the preceding financial year;

(b) in every other case - nil.

Meaning of “IFRS[2] change in net assets of a category of business”

38. The “IFRS change in net assets of a category of business” means the difference between:

(a) the amount that would have been reported as Life Insurance Act Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 had the version of those Prudential Rules (and the relevant Actuarial Standards) that apply to reporting periods commencing on or after 1 January 2005 applied at that date; and

(b) the amount that was reported as Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 under the version of those Prudential Rules (and the relevant Actuarial Standards) that applied at that date.

Starting amount for Australian policy owners’ retained profits

39. For the purposes of the definition of “Australian policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2.

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as:

(A) the life company determines; and

(B) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of those aggregate retained profits; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) Such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as

(i) the life company determines; and

(ii) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of the IFRS change in net assets of that category of business; and

(b) An amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for Australian policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for overseas policy owners’ retained profits

40. For the purposes of the definition of “overseas policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing overseas participating business as:

(A) the life company determines; and

(B) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(C) is not less than the amount of profits that is required to be allocated to overseas policy owners’ retained profits by:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as:

(i) the life company determines; and

(ii) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(iii) is not less than the amount of profit (represented by the change in net assets) that is required to be allocated to overseas policy owners’ retained profits by:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for overseas policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ retained profits (Australian participating)

41. For the purposes of the definition of “shareholders’ retained profits (Australian participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as is not allocated to the starting amount for Australian policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) 25% of the initial starting amount for Australian policy owners’ retained profits determined in accordance with this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as is not applied to increase the initial starting amount for Australian policy owner’ retained profits in accordance with this Prudential Standard; and

(b) an amount such that after applying the IFRS starting amount adjustment, the shareholders’ retained profits (Australian participating) of the statutory fund are equal to 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund (after the IFRS starting amount adjustment applied in accordance with this Prudential Standard).

Starting amount for shareholders’ retained profits (overseas and non-participating)

42. For the purposes of the definition of “shareholders’ retained profits (overseas and non- participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business as:

(i) the life company determines; and

(ii) is not allocated to retained profits under Part 1 of paragraphs 39 to 41; and

(b) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) the sum of:

(i) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as is not applied to increase the initial starting amount for overseas policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) the IFRS change in net assets of the category of business of the statutory fund representing non-participating business; and

(b) an amount that

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for shareholders’ retained profits (overseas and non-participating), as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ capital

43. For the purposes of the definition of “shareholders’ capital” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) the aggregate shareholders’ capital of the statutory fund; and

(b) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business or non-participating business as is not allocated to retained profits under Part 1 of paragraph 39 to 42.

Part 2

The IFRS starting amount adjustment is:

(a) the remaining balance of the IFRS change in net assets of each category of business of the statutory fund as is not applied to vary any of the other initial starting amounts under Part 2 of paragraphs 39 to 42.

Aggregate retained profits not to be allocated more than once

44. To avoid doubt, the sum of the amounts of aggregate retained profits of a category of business that are allocated to the initial starting amounts mentioned in Part 1 of paragraphs 39 to 43 must not exceed the total aggregate retained profits of the category.

Aggregate of IFRS starting amount adjustments

45. To avoid doubt, the sum of the IFRS starting amount adjustments under Part 2 of paragraphs 39 to 43 must equal the IFRS change in net assets of the statutory fund.

Distribution of Shareholders’ Retained Profits (Australian Participating)

46. For the purposes of subsection 62(5) of the Act, the distribution of shareholders’ retained profits (Australian participating) from a statutory fund is prohibited if:

(a) there is not, at the same time, a distribution of Australian policy owners’ retained profits from the statutory fund; and

(b) immediately after the distribution, the shareholders’ retained profits (Australian participating) of the statutory fund that remain undistributed are less than 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund that remain undistributed.

Unsecured borrowings of a statutory fund

47. For the purposes of subsection 38(4) of the Act, a life company must not borrow money by means of unsecured borrowing, for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.

where “free assets”, in relation to a statutory fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.

Form 1: Restructure of Statutory Funds

1. Name and Australian Business Number of life company

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2. Date from which the restructure is proposed to have effect

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3. Required documentation

By indicating “Yes” below, the signatory to this form confirms that the documents mentioned in Schedule 1 to this form have been attached.

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4. Contact person

Please provide the contact details for the person to whom enquiries relating to this application should be directed.

Name

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Position title

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Phone

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Email address

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5. Address for correspondence

Please provide the address to which correspondence relating to this application should be mailed.

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6. Signatures

This form must be signed by:

(a) the principal executive officer of the life company; or

(b) an officer of the life company who has been authorised for that purpose by the principal executive officer, if the principal executive officer has notified APRA in writing of the authorisation.

Name Position title

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Signature Date

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Please send completed form and accompanying documents to your responsible supervisor.
Schedule 1 to Form 1

Specified documents required to be lodged with Form 1

1. A statement of the nature of the receiving fund and the terms and conditions on which the restructure is to take place. The statement must include the following information:

(a) the identity of a transferring fund and a receiving fund; and

(b) the classes of life insurance business to be carried on by the company within the receiving fund; and

(c) the categories of life insurance business to be carried on by the company within each of those classes; and

(d) the sub-categories of life insurance business to be carried on by the company within each of those categories; and

(e) the kinds of policies within those categories and sub-categories and, where the policies are referable to more than one fund, the benefits to be written by the company within those categories and sub-categories; and

(f) the value of the policy liabilities to be transferred to the receiving fund, by kinds of policies; and

(g) the value of the policy liabilities to remain in the transferring fund, by kinds of policies; and

(h) the value of other liabilities (not being policy liabilities) to be transferred to the receiving fund; and

(i) the value of other liabilities (not being policy liabilities) to remain in the transferring fund; and

(j) the value of the assets to be transferred to the receiving fund, by asset class; and

(k) the value of the assets to remain in the transferring fund, by asset class; and

(l) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to be transferred to the receiving fund; and

(m) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to remain in the transferring fund.

2. A report by the appointed actuary on the proposed restructure, including:

(a) statement setting out the basis on which the nature and value of the assets to be transferred is to be determined; and

(b) statement as to whether the assets to be transferred are appropriate to the liabilities to be transferred; and

(c) statement as to whether the restructure will result in unfairness to the owners of the policies referable to any of the funds involved in the restructure; and

(d) statement as to whether, immediately after the restructure, a transferring fund and receiving fund will satisfy the solvency standard and the capital adequacy standard applicable to it under the Act.

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Authority

1. This Prudential Standard is made under section 230A(1)(a) of the Life Insurance Act 1995 (the Act).

Application of this Prudential Standard

2. This Prudential Standard applies to all life companies other than friendly societies registered under the Act.[1]

3. A life company must comply with this Prudential Standard from 1 July 2011.

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Prudential Standard LPS 600

Statutory Funds

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Authority

1. This Prudential Standard is made under section 230A(1)(a) of the Life Insurance Act 1995 (the Act).

Application of this Prudential Standard

2. This Prudential Standard applies to all life companies other than friendly societies registered under the Act.[1]

3. A life company must comply with this Prudential Standard from 1 July 2011.

Restructure of statutory funds

Application for restructure of statutory funds

4. Restructure of statutory funds are subject to the requirements set out in section 52 of the Act and in this Prudential Standard.

5. An application for a restructure of a benefit fund under section 52 of the Act must:

(a) be made using the “Form 1” to this Prudential Standard; and

(b) be accompanied by the documents mentioned in “Schedule 1” to Form 1 and be lodged with APRA at least 30 days before the proposed date of restructure.

6. The applicant must, on request by APRA and within the time specified, produce to APRA:

(a) a report by an independent actuary (being an actuary, other than the Appointed Actuary, who is approved by APRA in writing to perform duties as required by APRA and paid for by the life company for the purposes of this Prudential Standard) including statements on the same matters as those required of the appointed actuary; and/or

(b) documents that are provided to policy owners or prospective policy owners of the company that contain details of the terms and conditions of:

(i) policies of the kind that will remain referable to the transferring fund; and

(ii) policies of the kind that will become referable to the receiving fund.

Approval of application for restructure of statutory funds

7. Subject to this Prudential Standard, APRA may approve an application by a life company for a restructure of its statutory funds.

8. APRA may refuse to approve an application by a life company for a restructure of its statutory fund or funds if it considers that immediately after the restructure:

(a) a transferring fund; or

(b) a receiving fund

will not satisfy the capital adequacy standard applicable to it under the Act.

Identification of policies

9. Before a restructure has effect, a life company must make a written determination identifying the policies referable to a transferring fund that are to be referable to a receiving fund.

Transfer of assets

10. A life company shall transfer assets from a transferring fund to a receiving fund as soon as practicable after the transfer of liabilities from the transferring fund to the receiving fund.

11. Assets that are transferred from a transferring fund to a receiving fund shall be treated as assets of a receiving fund on and from the date the restructure has effect.

12. The nature and value of assets to be transferred from a transferring fund to a receiving fund is to be determined by the appointed actuary using a method that:

(a) places a value on the liabilities that is consistent with the value being adopted for the assets; and

(b) considers the nature and value of the assets in aggregate and also in respect of each particular class of assets; and

(c) in view of the nature of the liabilities to be transferred to a receiving fund and those to remain in a transferring fund, has the objectives of:

(i) facilitating the proper operation of the transferring fund and the receiving fund; and

(ii) protecting the interests of the owners of the policies referable to the transferring fund and the receiving fund; and

(d) is consistent with the method that was described in the appointed actuary’s report that:

(i) was lodged with APRA in relation to the application in accordance with Schedule 1 of Form 1; and

(ii) was approved by APRA as part of its approval under paragraph 7.

When restructure has effect

13. The restructure of statutory funds of a life company shall have effect when:

(a) policies that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(b) policy and other liabilities that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(c) assets that, immediately before the restructure, were assets of a transferring fund become assets of a receiving fund

to the extent specified in documents supporting an application under paragraph 5 provided to APRA.

Notification of interested persons

14. A life company that restructures a statutory fund must, within 6 weeks of the restructure having effect, give written notice of the restructure of the fund to the owner of every policy referable to any of the funds involved in the restructure.

15. A notice under paragraph 14 must set out the following matters:

(a) the name and identifying details of the funds involved in the restructure;

(b) the date of the restructure;

(c) the identifying details of each policy owner’s policy that is referable to either the transferring fund or the receiving fund;

(d) where the benefits under the policy are to be provided out of more than one statutory fund:

(i) the benefits under the policy that are to be provided out of each fund; and

(ii) either the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund or the way in which that proportion is to be calculated.

16. A notice under paragraph 14 must be accompanied by:

(a) a document describing (in summary form) the reasons for the restructure and containing relevant extracts from any report by the appointed actuary on the proposed restructure under item 2 of Schedule 1 to Form 1 which deal with implications for policy owners; and

(b) a revision to the policy document by way of endorsement or written notice setting out matters in paragraphs 15(a) and 15(b) of this Prudential Standard.

Information to be lodged with APRA following the restructure

17. If a restructure of statutory funds involves the establishment of a new statutory fund (the ‘receiving fund’), the life company must give to APRA, within 6 weeks after the establishment of the receiving fund, a written notice setting out the following:

(a) the nature and terms of the establishment of the receiving fund; and

(b) the nature and value of assets transferred from a transferring fund to the receiving fund; and

(c) the kinds of policies that are referable to the receiving fund.

18. The notice referred to in paragraph 17 must be accompanied by statements that the receiving fund has been established in accordance with section 52 of the Act, certified by:

(a) the principal executive officer; and

(b) the appointed actuary; and

(c) the auditor.

Operational requirements

Consequences of transfer of policy between statutory funds

19. For the purposes of subsections 55(2) and (3) of the Act, the part of the liabilities (including policy liabilities) of the company, mentioned in subsection 55(2) of the Act, must be ascertained in a manner which, in the opinion of the appointed actuary, will not result in unfairness to the owners of the policies that remain referable to a fund or to the owners of the policies that cease to be referable to that fund (particularly having regard to the nature of the assets to be transferred).

20. A notice mentioned in subsection 55(3) of the Act must:

(a) be in writing; and

(b) set out:

(i) the identifying details of the policy; and

(ii) the identity of all the statutory funds to which the policy is or has become referable; and

(iii) the identity of all the statutory funds to which the policy has ceased to be referable; and

(iv) the date on which the policy became referable to the fund or funds to which it has become referable; and

(v) where the policy is referable to 2 or more statutory funds:

(A) the benefits under the policy that are to be provided out of each fund; and

(B) either:

1. the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund; or
2. the way in which that proportion is to be calculated; and

(c) be given to the policy owner within 6 weeks after the occurrence of whichever of the circumstances described in paragraphs 55(3)(a) and 55(3)(b) of the Act is applicable.

Single bank account for statutory funds

21. For the purposes of subsection 34(4) of the Act, the bank account must be maintained in accordance with the following standards:

(a) A statutory fund account must be established in the records of the life company in respect of each statutory fund in respect of which the bank account is maintained.

(b) The statutory fund account must be a current account (or ledger) that records, as accounting entries, drawings from and receipts by the bank account in respect of the statutory fund.

(c) The drawings and receipts must be balanced by offsetting entries in both the bank account and the statutory fund account.

(d) The balancing must be carried out not less frequently than once every 7 days, except that:

(i) in the case of drawings or receipts relating to investment-linked contracts, the balancing must be carried out not less frequently than the frequency at which the unit prices relevant to the contract concerned are quoted by the person managing the unitised investment concerned, and in any event not less frequently than once every 7 days;

(ii) in the case of drawings or receipts of amounts that are less than or equal to the greater of:

(A) $500,000; or

(B) 1% of the value of the assets of the statutory fund as last reported to APRA; the balancing may be carried out not less frequently than once every 28 days.

(e) A debit balance in the statutory fund account must be recorded as a “sundry debtor”, and a credit balance as a “sundry creditor”.

(f) Interest must accrue daily on any balance (whether credit or debit) in the statutory fund account, at a rate that the company believes, on reasonable grounds, is fair and reasonable to the policyholders whose policies are referable to the statutory fund having regard to the interest earned by the bank account.

(g) The net position of all the statutory fund accounts in aggregate must be reconciled not less frequently than once every 28 days. When so reconciled the net position must be equal to the balance of the bank account at that time.

(h) If, at any time, the balance (whether credit or debit) in a statutory fund account comes to exceed the greater of:

(i) $500,000; or

(ii) 1% of the value of the assets of the statutory fund as last reported to APRA;

the company must, in writing, within 28 days after that time, tell APRA and give APRA particulars of the transactions that caused the balance to exceed the applicable amount.

Non-participating benefits

22. For the purposes of subsection 15(3) of the Act, the following benefits, as specified in paragraphs 23-28, are non-participating benefits:

Policies insuring multiple lives with limited form of profit sharing

23. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy that does not have any investment component;

(b) a group of 2 or more people are insured by the policy against the same contingencies;

(c) the benefit has the features mentioned in paragraph 15(2)(b) of the Act;

(d) the benefit includes an entitlement to share in a distribution by the life company of profits or surplus, but only by way of repayment of premiums previously paid or reduction of future premiums;

(e) the amount of the entitlement is determined by reference to the history of claims made under one or both of the following:

(i) the policy;

(ii) policies of the same kind as the policy.

Investment-linked contracts

24. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment-linked benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Investment account contracts

25. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the interest payable on the account is dependent on, or to be ascertained according to, a decision of the company:

(i) the benefit is provided for by a policy that belongs to a particular subcategory of life insurance business; and

(ii) no other kind of policy is contained within that subcategory; and

(iii) the net investment earnings (including realised and unrealised gains) of the assets administered for the purposes of that subcategory are credited to the policies belonging to that subcategory; and

(iv) the aggregate value of the accounts under the policies belonging to that subcategory does not, and will not at any time, exceed 103% of the value of the assets administered for the purposes of that subcategory; and

(v) the aggregate value of those accounts does not, and will not at any time, fall below 95% of the value of the assets administered for the purposes of that subcategory;

(e) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount – do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(f) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or more of the following:

(i) the interest payable on the account;

(ii) the charges payable under the policy;

(iii) the surrender value of the policy;

(g) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies other than investment-linked or investment account contracts

26. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is not an investment-linked benefit or an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or both of the following:

(i) the charges payable under the policy;

(ii) the surrender value of the policy;

(f) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies providing rolling fixed rates for fixed terms

27. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(b) the policy:

(i) provides for a benefit in respect of each of 2 or more consecutive specified periods occurring during the term of the policy; and

(ii) provides that the benefit in respect of each of the specified periods is to be determined at or before the commencement of the period; and

(iii) gives the policyholder the option, at or before the end of each of the specified periods that end before the expiry of the term of the policy, to surrender the policy; and

(iv) does not provide for any benefits other than those mentioned in subparagraph (i);

(c) if the benefit in respect of each of the specified periods were the only benefit provided for by the policy, that benefit would be a non-participating benefit by virtue of:

(i) subsection 15(2) of the Act; or

(ii) this Prudential Standard;

(d) the circumstances in which and the conditions subject to which the company may make a determination mentioned in subparagraph (b)(ii) are set out in the policy document.

Transitional

28. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy issued by the life company before 1 January 1996;

(b) the policy is a kind of policy which the company had available for issue on 30 June 1995 (in circumstances where all pre-conditions under the Life Insurance Act 1945 to the issuing of that kind of policy were satisfied);

(c) if the policy had been issued at the end of 30 June 1995, it would not have been a participating policy within the meaning of the Life Insurance Act 1945 (as then in force).

Note: To avoid doubt, in this standard “charges” includes fees.

Starting Amount

29. For the purposes of subsection 61(1) of the Act:

Interpretation – general

30. The definitions in paragraphs 31 to 38 apply for the purposes of this Prudential Standard.

Meaning of “starting date”

31. The “starting date” is the first day of the life company’s first financial year ending on or after 31 December 1996.

Meaning of “preceding financial year”

32. The “preceding financial year” is the life company’s financial year ending immediately before the starting date.

Meaning of “transitional actuarial standard”

33. The “transitional actuarial standard” is the Actuarial Standard for Valuation of Policy Liabilities which is contained in the set of actuarial standards entitled “Transitional Provisions for the Valuation of Policy Liabilities, Solvency and Capital Adequacy Standards and Calculation of Paid Up Values and Surrender Values” issued June 1995 by the Life Insurance Actuarial Standards Board.

Meaning of “aggregate retained profits”

34. The “aggregate retained profits” of a category of business of a statutory fund is an amount worked out in accordance with the following formula:

net assets of category  policy liabilities of category

where:

“net assets of category” means the net assets of the category determined in accordance with paragraph 35;

“policy liabilities of category” means the policy liabilities of the category as at the starting date determined in accordance with actuarial standard AS1.01 issued October 1996 by the Life Insurance Actuarial Standards Board.

Meaning of “net assets” in paragraph 34

35. For the purposes of paragraph 34, the “net assets” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the assets and liabilities of the category as at the end of the preceding financial year - an amount worked out in accordance with the following formula:

assets of category  liabilities of category  shareholders’ capital of category

where:

“assets of category” means the value of the assets of the category as at the end of the preceding financial year;

“liabilities of category” means the liabilities of the category, other than the policy liabilities of the category determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“shareholders’ capital of category” means the shareholders’ capital of the category determined in accordance with paragraph 37;

(b) in every other case - an amount worked out in accordance with the following formula:

(assets of fund  liabilities of fund  aggregate shareholders’ capital of fund)

 (transitional actuarial standard policy liabilities of category  transitional actuarial standard policy liabilities of fund)

where:

“assets of fund” means the value of the assets of the statutory fund as at the end of the preceding financial year;

“liabilities of fund” means the liabilities of the statutory fund, other than the policy liabilities of the statutory fund determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“aggregate shareholders’ capital of fund” means the aggregate shareholders’ capital of the statutory fund as at the end of the preceding financial year determined in accordance with paragraph 36;

“transitional actuarial standard policy liabilities of category” means the policy liabilities of the category as at the end of the preceding financial year determined in accordance with the transitional actuarial standard;

“transitional actuarial standard policy liabilities of fund” means the policy liabilities of the statutory fund as at the end of the preceding financial year determined in accordance with the transitional actuarial standard.

Meaning of “aggregate shareholders’ capital”

36. The “aggregate shareholders’ capital” of a statutory fund is the sum of the shareholders’ capital of each category of business of the statutory fund determined in accordance with paragraph 37.

Meaning of “shareholders’ capital” in paragraphs 35 and 36

37. For the purposes of paragraphs 35 and 36, the “shareholders’ capital” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the shareholders’ capital of the category as at the end of the preceding financial year – the shareholders’ capital of the category as at the end of the preceding financial year;

(b) in every other case - nil.

Meaning of “IFRS[2] change in net assets of a category of business”

38. The “IFRS change in net assets of a category of business” means the difference between:

(a) the amount that would have been reported as Life Insurance Act Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 had the version of those Prudential Rules (and the relevant Actuarial Standards) that apply to reporting periods commencing on or after 1 January 2005 applied at that date; and

(b) the amount that was reported as Net Assets in respect of that category under Form K of Schedule 2 of Prudential Rules No 35 as at the end of the reporting period ending on or immediately after 31 December 2004 under the version of those Prudential Rules (and the relevant Actuarial Standards) that applied at that date.

Starting amount for Australian policy owners’ retained profits

39. For the purposes of the definition of “Australian policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2.

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as:

(A) the life company determines; and

(B) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of those aggregate retained profits; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) Such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as

(i) the life company determines; and

(ii) is at least 80%, or such higher percentage as is specified in the life company’s constitution, of the IFRS change in net assets of that category of business; and

(b) An amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for Australian policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for overseas policy owners’ retained profits

40. For the purposes of the definition of “overseas policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing overseas participating business as:

(A) the life company determines; and

(B) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(C) is not less than the amount of profits that is required to be allocated to overseas policy owners’ retained profits by:

(1) the life company’s constitution; or

(2) any foreign regulatory requirements applying to the life company; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund; and

(C) is to be taken as the initial starting amount; and

(ii) is approved in writing by APRA for the purposes of this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as:

(i) the life company determines; and

(ii) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(iii) is not less than the amount of profit (represented by the change in net assets) that is required to be allocated to overseas policy owners’ retained profits by:

(A) the life company’s constitution; or

(B) any foreign regulatory requirements applying to the life company; and

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for overseas policy owners’ retained profits, as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund in light of those accounting changes; and

(D) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ retained profits (Australian participating)

41. For the purposes of the definition of “shareholders’ retained profits (Australian participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as is not allocated to the starting amount for Australian policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) 25% of the initial starting amount for Australian policy owners’ retained profits determined in accordance with this Prudential Standard.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) such part of the IFRS change in net assets of the category of business of the statutory fund representing Australian participating business as is not applied to increase the initial starting amount for Australian policy owner’ retained profits in accordance with this Prudential Standard; and

(b) an amount such that after applying the IFRS starting amount adjustment, the shareholders’ retained profits (Australian participating) of the statutory fund are equal to 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund (after the IFRS starting amount adjustment applied in accordance with this Prudential Standard).

Starting amount for shareholders’ retained profits (overseas and non-participating)

42. For the purposes of the definition of “shareholders’ retained profits (overseas and non- participating)” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business as:

(i) the life company determines; and

(ii) is not allocated to retained profits under Part 1 of paragraphs 39 to 41; and

(b) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines.

Part 2

The IFRS starting amount adjustment is the greater of:

(a) the sum of:

(i) such part of the IFRS change in net assets of the category of business of the statutory fund representing overseas participating business as is not applied to increase the initial starting amount for overseas policy owners’ retained profits in accordance with this Prudential Standard; and

(ii) the IFRS change in net assets of the category of business of the statutory fund representing non-participating business; and

(b) an amount that

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the substance of the changes in accounting standards made as at the start of the reporting period commencing on or after 1 January 2005; and

(B) is consistent with the basis on which the starting amount for shareholders’ retained profits (overseas and non-participating), as used for reporting in respect of the reporting period commencing on or after 1 January 1996, was determined by the appointed actuary at the time; and

(C) should be taken to be the amount by which the starting amount is changed; and

(ii) is approved in writing by APRA for the purpose of this Prudential Standard.

Starting amount for shareholders’ capital

43. For the purposes of the definition of “shareholders’ capital” in subsection 61(1) of the Act, the starting amount is the initial starting amount under Part 1 plus the IFRS starting amount adjustment under Part 2:

Part 1

The initial starting amount is the sum of the following amounts:

(a) the aggregate shareholders’ capital of the statutory fund; and

(b) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business or non-participating business as is not allocated to retained profits under Part 1 of paragraph 39 to 42.

Part 2

The IFRS starting amount adjustment is:

(a) the remaining balance of the IFRS change in net assets of each category of business of the statutory fund as is not applied to vary any of the other initial starting amounts under Part 2 of paragraphs 39 to 42.

Aggregate retained profits not to be allocated more than once

44. To avoid doubt, the sum of the amounts of aggregate retained profits of a category of business that are allocated to the initial starting amounts mentioned in Part 1 of paragraphs 39 to 43 must not exceed the total aggregate retained profits of the category.

Aggregate of IFRS starting amount adjustments

45. To avoid doubt, the sum of the IFRS starting amount adjustments under Part 2 of paragraphs 39 to 43 must equal the IFRS change in net assets of the statutory fund.

Distribution of Shareholders’ Retained Profits (Australian Participating)

46. For the purposes of subsection 62(5) of the Act, the distribution of shareholders’ retained profits (Australian participating) from a statutory fund is prohibited if:

(a) there is not, at the same time, a distribution of Australian policy owners’ retained profits from the statutory fund; and

(b) immediately after the distribution, the shareholders’ retained profits (Australian participating) of the statutory fund that remain undistributed are less than 25% (or such lower percentage as is specified in the life company’s constitution) of the Australian policy owners’ retained profits of the statutory fund that remain undistributed.

Unsecured borrowings of a statutory fund

47. For the purposes of subsection 38(4) of the Act, a life company must not borrow money by means of unsecured borrowing, for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.

where “free assets”, in relation to a statutory fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.

Form 1: Restructure of Statutory Funds

1. Name and Australian Business Number of life company

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2. Date from which the restructure is proposed to have effect

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3. Required documentation

By indicating “Yes” below, the signatory to this form confirms that the documents mentioned in Schedule 1 to this form have been attached.

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4. Contact person

Please provide the contact details for the person to whom enquiries relating to this application should be directed.

Name

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Position title

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Phone

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Email address

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5. Address for correspondence

Please provide the address to which correspondence relating to this application should be mailed.

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6. Signatures

This form must be signed by:

(a) the principal executive officer of the life company; or

(b) an officer of the life company who has been authorised for that purpose by the principal executive officer, if the principal executive officer has notified APRA in writing of the authorisation.

Name Position title

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Signature Date

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Please send completed form and accompanying documents to your responsible supervisor.
Schedule 1 to Form 1

Specified documents required to be lodged with Form 1

1. A statement of the nature of the receiving fund and the terms and conditions on which the restructure is to take place. The statement must include the following information:

(a) the identity of a transferring fund and a receiving fund; and

(b) the classes of life insurance business to be carried on by the company within the receiving fund; and

(c) the categories of life insurance business to be carried on by the company within each of those classes; and

(d) the sub-categories of life insurance business to be carried on by the company within each of those categories; and

(e) the kinds of policies within those categories and sub-categories and, where the policies are referable to more than one fund, the benefits to be written by the company within those categories and sub-categories; and

(f) the value of the policy liabilities to be transferred to the receiving fund, by kinds of policies; and

(g) the value of the policy liabilities to remain in the transferring fund, by kinds of policies; and

(h) the value of other liabilities (not being policy liabilities) to be transferred to the receiving fund; and

(i) the value of other liabilities (not being policy liabilities) to remain in the transferring fund; and

(j) the value of the assets to be transferred to the receiving fund, by asset class; and

(k) the value of the assets to remain in the transferring fund, by asset class; and

(l) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to be transferred to the receiving fund; and

(m) the value of the amounts determined for the purposes of allocation and distribution of profits and losses under Divisions 5 and 6 of Part 4 of the Act to remain in the transferring fund.

2. A report by the appointed actuary on the proposed restructure, including:

(a) statement setting out the basis on which the nature and value of the assets to be transferred is to be determined; and

(b) statement as to whether the assets to be transferred are appropriate to the liabilities to be transferred; and

(c) statement as to whether the restructure will result in unfairness to the owners of the policies referable to any of the funds involved in the restructure; and

(d) statement as to whether, immediately after the restructure, a transferring fund and receiving fund will satisfy the solvency standard and the capital adequacy standard applicable to it under the Act.

Application for restructure of statutory funds

4. Restructure of statutory funds are subject to the requirements set out in section 52 of the Act and in this Prudential Standard.

5. An application for a restructure of a benefit fund under section 52 of the Act must:

(a) be made using the “Form 1” to this Prudential Standard; and

(b) be accompanied by the documents mentioned in “Schedule 1” to Form 1 and be lodged with APRA at least 30 days before the proposed date of restructure.

6. The applicant must, on request by APRA and within the time specified, produce to APRA:

(a) a report by an independent actuary (being an actuary, other than the Appointed Actuary, who is approved by APRA in writing to perform duties as required by APRA and paid for by the life company for the purposes of this Prudential Standard) including statements on the same matters as those required of the appointed actuary; and/or

(b) documents that are provided to policy owners or prospective policy owners of the company that contain details of the terms and conditions of:

(i) policies of the kind that will remain referable to the transferring fund; and

(ii) policies of the kind that will become referable to the receiving fund.

Approval of application for restructure of statutory funds

7. Subject to this Prudential Standard, APRA may approve an application by a life company for a restructure of its statutory funds.

8. APRA may refuse to approve an application by a life company for a restructure of its statutory fund or funds if it considers that immediately after the restructure:

(a) a transferring fund; or

(b) a receiving fund

will not satisfy the capital adequacy standard applicable to it under the Act.

Identification of policies

9. Before a restructure has effect, a life company must make a written determination identifying the policies referable to a transferring fund that are to be referable to a receiving fund.

Transfer of assets

10. A life company shall transfer assets from a transferring fund to a receiving fund as soon as practicable after the transfer of liabilities from the transferring fund to the receiving fund.

11. Assets that are transferred from a transferring fund to a receiving fund shall be treated as assets of a receiving fund on and from the date the restructure has effect.

12. The nature and value of assets to be transferred from a transferring fund to a receiving fund is to be determined by the appointed actuary using a method that:

(a) places a value on the liabilities that is consistent with the value being adopted for the assets; and

(b) considers the nature and value of the assets in aggregate and also in respect of each particular class of assets; and

(c) in view of the nature of the liabilities to be transferred to a receiving fund and those to remain in a transferring fund, has the objectives of:

(i) facilitating the proper operation of the transferring fund and the receiving fund; and

(ii) protecting the interests of the owners of the policies referable to the transferring fund and the receiving fund; and

(d) is consistent with the method that was described in the appointed actuary’s report that:

(i) was lodged with APRA in relation to the application in accordance with Schedule 1 of Form 1; and

(ii) was approved by APRA as part of its approval under paragraph 7.

When restructure has effect

13. The restructure of statutory funds of a life company shall have effect when:

(a) policies that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(b) policy and other liabilities that, immediately before the restructure, were referable to a transferring fund become referable to a receiving fund; and

(c) assets that, immediately before the restructure, were assets of a transferring fund become assets of a receiving fund

to the extent specified in documents supporting an application under paragraph 5 provided to APRA.

Notification of interested persons

14. A life company that restructures a statutory fund must, within 6 weeks of the restructure having effect, give written notice of the restructure of the fund to the owner of every policy referable to any of the funds involved in the restructure.

15. A notice under paragraph 14 must set out the following matters:

(a) the name and identifying details of the funds involved in the restructure;

(b) the date of the restructure;

(c) the identifying details of each policy owner’s policy that is referable to either the transferring fund or the receiving fund;

(d) where the benefits under the policy are to be provided out of more than one statutory fund:

(i) the benefits under the policy that are to be provided out of each fund; and

(ii) either the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund or the way in which that proportion is to be calculated.

16. A notice under paragraph 14 must be accompanied by:

(a) a document describing (in summary form) the reasons for the restructure and containing relevant extracts from any report by the appointed actuary on the proposed restructure under item 2 of Schedule 1 to Form 1 which deal with implications for policy owners; and

(b) a revision to the policy document by way of endorsement or written notice setting out matters in paragraphs 15(a) and 15(b) of this Prudential Standard.

Information to be lodged with APRA following the restructure

17. If a restructure of statutory funds involves the establishment of a new statutory fund (the ‘receiving fund’), the life company must give to APRA, within 6 weeks after the establishment of the receiving fund, a written notice setting out the following:

(a) the nature and terms of the establishment of the receiving fund; and

(b) the nature and value of assets transferred from a transferring fund to the receiving fund; and

(c) the kinds of policies that are referable to the receiving fund.

18. The notice referred to in paragraph 17 must be accompanied by statements that the receiving fund has been established in accordance with section 52 of the Act, certified by:

(a) the principal executive officer; and

(b) the appointed actuary; and

(c) the auditor.