Life insurance (prudential standard) determination No. 1 of 2019

This instrument revokes the prior Life Insurance (prudential standard) determination No. 16 of 2012 and, under Life Insurance Act 1995 (the Act) subsection 230A(1), determines Prudential Standard LPS 700 Friendly Society Benefit Funds in a new form that applies to all life companies that are friendly societies (see the instrument preamble and paragraph 1). It takes effect on 1 July 2019 (instrument signature block).

Mechanically, the Determination sets binding prudential requirements for how friendly societies must structure, govern, operate and modify their approved benefit funds. The Prudential Standard prescribes (inter alia): the required content of approved benefit fund rules (paragraph 5); the classification of funds as defined contribution or defined benefit (paragraphs 6 to 10); constraints and process for allocation and distribution of surplus (paragraphs 11 to 13); rules on seed capital transfers between management fund and approved benefit funds (paragraphs 14 to 16); rules that require benefits paid for member contributions to come from an approved benefit fund (paragraphs 17 to 18); detailed controls and recordkeeping for joint investments and single bank accounts that hold assets of more than one fund (paragraphs 19 to 32); processes and forms for APRA approval of new benefit fund rules, amendments, consequential constitution amendments and the forms APRA expects to be used (paragraphs 33 to 52 and Forms 1 to 4); the process, evidentiary requirements and timing for restructures of approved benefit funds (paragraphs 53 to 73 and Form 5); the process, evidentiary requirements and timing for termination of approved benefit funds (paragraphs 74 to 89 and Form 6); an unsecured borrowing limit relative to free assets (paragraph 90); APRA powers to adjust or exclude specific requirements (paragraph 91); and continuation of prior APRA discretions under previous versions of the standard (paragraph 92).

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Life insurance (prudential standard) determination No. 1 of 2019

Prudential Standard LPS 700 Friendly Society Benefit Funds

Life Insurance Act 1995

I, Pat Brennan, delegate of APRA:

(a) under subsection 230A(5) of the Life Insurance Act 1995 (the Act) REVOKE Life Insurance (prudential standard) determination No. 16 of 2012, including Prudential Standard LPS 700 Friendly Society Benefit Funds made under that Determination; and

(b) under subsection 230A(1) of the Act DETERMINE Prudential Standard LPS 700 Friendly Society Benefit Funds, in the form set out in the Schedule, which applies to all life companies that are friendly societies.

This instrument takes effect on 1 July 2019.

Dated: 17 April 2019

[Signed]

Pat Brennan

Executive General Manager

Policy and Advice Division

Interpretation

In this Determination:

APRA means the Australian Prudential Regulation Authority.

friendly society has the meaning given in section 16C of the Act.

life company has the meaning given in the Dictionary to the Act.

Schedule

Prudential Standard LPS 700 Friendly Society Benefit Funds comprises the 35 pages commencing on the following page.

Prudential Standard LPS 700

Friendly Society Benefit Funds

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Table of Contents

Authority

Application

Interpretation

Content of approved benefit fund rules

Operational requirements

Approval and amendment of benefit fund rules and consequential approval of a friendly society’s constitution.......

Restructure of approved benefit funds

Termination of approved benefit funds

Unsecured borrowings of an approved benefit fund

Adjustments and exclusions

Determinations made under previous prudential standards

Forms

Form 1: Approval of friendly society benefit fund rules

Form 2: Approval of amendment of approved benefit fund rules

Form 3: Approval of consequential amendments of company’s constitution on initiative of a friendly society

Form 4: Approval of consequential amendments of a company’s constitution as required by APRA

Form 5: Restructure of approved benefit funds

Schedule 1 to Form 5

Form 6: Termination of approved benefit funds

Schedule 1 to Form 6

Authority

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

Application

2. This Prudential Standard applies to life companies that are friendly societies pursuant to section 16A of the Act.[1]

3. This Prudential Standard applies to friendly societies from 1 July 2019.

Interpretation

4. Terms that are defined in Prudential Standard LPS 001 Definitions appear in bold the first time they are used in this Prudential Standard.

Content of approved benefit fund rules

General content

5. Subject to, and for the purposes of, the requirements of the Act as modified, a friendly society must have approved benefit fund rules that adequately provide for, amongst other things, the following matters with respect to each approved benefit fund:

(a) the name of the approved benefit fund;

(b) in addition to matters dealt with under the constitution of the company for the purposes of the Corporations Act 2001, terms and conditions governing the operation of the approved benefit fund and the rights and obligations of both the friendly society and a member of an approved benefit fund under the policy contract;

(d) contribution rates for benefits, including any minimum contributions;

(e) method of determination of benefit payments under each possible contingency and any required notice period before the benefit is payable;

(f) any guaranteed benefits;

(g) membership of the approved benefit fund;

(h) authorised investments of the approved benefit fund;

(i) whether the fund is a defined contribution or defined benefit fund, as set out in this Prudential Standard;

(j) any costs or expenses which may be paid directly from the approved benefit fund;

(k) effect of taxation, including the method of calculation;

(l) whether the friendly society has the ability to make any transfers, by way of fees, transfer of surplus or otherwise, from the approved benefit fund to the management fund or other approved benefit funds of the friendly society; and

(m) whether the friendly society has the ability to allocate or distribute surplus.

Operational requirements

Classification of approved benefit funds

6. For the purposes of this Prudential Standard, a friendly society must classify an approved benefit fund as either ‘defined contribution’ or ‘defined benefit’.

7. Subject to paragraphs 8 to 10:

(a) an approved benefit fund should be classified as defined contribution where the benefit is derived from contributions made by the member, in accordance with the approved benefit fund rules, together with the investment performance of the assets of the approved benefit fund; and

(b) an approved benefit fund should be classified as defined benefit where the amount of any benefit is specified in, or determined in accordance with, a formula set out in approved benefit fund rules and the amount of the benefit is not directly related to the assets of the approved benefit fund or the investment performance of those assets.

8. Where an approved benefit fund provides for a benefit which meets the characteristics of both paragraphs 7(a) and 7(b), then the approved benefit fund must be classified as either defined benefit or defined contribution according to the dominant characteristics of that benefit.

9. A friendly society may apply to APRA for a written determination of the classification of any approved benefit fund.

10. Notwithstanding any determination under paragraph 9, APRA may, by written notice, determine the classification of any approved benefit fund of a friendly society.

Allocation or distribution of approved benefit fund surplus

11. The board of a friendly society must seek and consider the written advice of the Appointed Actuary prior to making any allocation or distribution of surplus under modified section 56 of the Act with respect to each approved benefit fund of the friendly society. The Appointed Actuary's advice must include, as applicable:

(a) the effect of the proposal on the approved benefit fund’s compliance with the requirements of Prudential Standard LPS 110 Capital Adequacy (LPS 110) and Prudential Standard LPS 112 Capital Adequacy: Measurement of Capital (LPS 112);

(b) whether or not the proposed distribution is consistent with representations made to members;

(c) the level of unallocated surplus after the proposed allocation or distribution, relative to the liabilities of the fund, and whether or not the level is unduly large;

(d) the extent to which level of unallocated surplus may give rise to undue intergenerational inequity;

(e) the extent to which the proposal is fair and equitable with regard to different members of the particular approved benefit fund and the general membership of the friendly society;

(f) the extent to which the proposal would equitably reflect the relative contribution of different members to the creation of the surplus;

(g) the extent to which the surplus has arisen due to management fund fees being less than the cost of servicing the approved benefit fund;

(h) the possible and probable effects of the proposal on the finances of the approved benefit fund, and the friendly society more generally; and

(i) the probable future course of surplus creation in the approved benefit fund and hence the probable future surplus available for allocation or distribution.

12. For the purposes of modified subsection 56(3) of the Act, a friendly society, with respect to a defined contribution fund:

(a) must not distribute any surplus arising in that fund to the management fund or to another approved benefit fund;

(b) must, in relation to any surplus in an approved benefit fund:

(i) allocate or distribute the surplus to members of that approved benefit fund; or

(ii) maintain the surplus as unallocated surplus of that approved benefit fund; and

(c) may make transfers (which exclude surplus, but may include any fees) from that fund to the management fund only if the approved benefit fund rules of the fund provide expressly for such transfers.

13. For the purposes of modified subsection 56(3) of the Act, a friendly society, with respect to a defined benefit fund may, in accordance with its approved benefit fund rules, allocate or distribute any surplus to one or more of the following:

(a) the members of the approved benefit fund; or

(b) the management fund; or

Seed capital

14. Subject to paragraph 15, a friendly society may transfer an amount from the management fund to an approved benefit fund with prior written approval from APRA. Such an amount is ‘seed capital’ and may be included in the net assets of an approved benefit fund under LPS 112 for the purposes of meeting the requirements of LPS 110 for the approved benefit fund.

15. A friendly society must not repay seed capital from an approved benefit fund to the management fund:

(a) unless the approved benefit fund, after any such repayment, continues to meet the requirements of LPS 110 and LPS 112; and

(b) if any interest paid to the management fund in relation to the seed capital exceeds the earning rate of the approved benefit fund during the period when the seed capital forms part of the approved benefit fund.

16. Any seed capital that is a receivable from an approved benefit fund must be deducted from the net assets of the management fund in accordance with LPS 112.

Provision of financial benefits

17. Subject to paragraph 18, a friendly society must not pay, or provide for the payment of, amounts to which a member or any other person may be, or may become entitled to, because of contributions or payments made to the friendly society (whether by that member or person or by another person) unless the friendly society:

(a) maintains an approved benefit fund for the receipt of such contributions and payments; and

(b) pays those amounts as benefits from the approved benefit fund.

18. Paragraph 17 does not apply to amounts payable by a friendly society:

(a) in respect of shares of the friendly society; or

(b) as trustee for a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act 1993.

Joint investments of approved benefit funds

19. A friendly society may only invest assets of two or more approved benefit funds in a single ‘joint investment’ if it does so in accordance with subsection 16H(4A) of the Act and paragraphs 20 to 25.

20. In respect of a joint investment, a friendly society must:

(a) establish a joint investment account in the records of each contributing fund that identifies each contributing fund's contribution;

(b) keep a joint investment register that records all transactions of each joint investment and of each contributing fund’s contribution in each separate joint investment; and

(c) reconcile the aggregate of the joint investment accounts kept in the records of each contributing fund with the friendly society’s joint investment register.

21. In respect of a joint investment, a friendly society must ensure that:

(a) the investment is readily able to be liquefied; and

(b) investment decisions in respect of one contributing fund do not directly affect the asset exposures of any other contributing fund.

22. In respect of a joint investment, a friendly society must allocate:

(a) the income received from the joint investment to the contributing funds equitably in accordance with their respective contributions; and

(b) any direct costs of redemption to the contributing funds in accordance with their respective contributions.

23. In respect of a joint investment, subject to paragraphs 24 to 25, a friendly society must reconcile the joint investment accounts kept in the register of each contributing fund with the friendly society’s joint investment register at least once every seven days, or at such other time as permitted by APRA.

24. If a joint investment is an investment relating to unitised contracts, the friendly society must carry out the reconciliation referred to in paragraph 23 at least as frequently as the unit prices in relation to the relevant contract are quoted, but in any event, at least once every seven days or at such other time as permitted by APRA.

25. In respect of a joint investment for which a friendly society conducts a mark to market exercise on a more frequent basis than once every seven days, the reconciliation referred to in paragraph 23 must be carried out at least as frequently as the mark to market exercise.

Single bank accounts for two or more approved benefit funds

26. A friendly society may only maintain a ‘single bank account’ for money that constitutes assets of two or more approved benefit funds, as allowed under subsection 16H(4) of the Act, where it complies with paragraphs 27 to 32.

27. In respect of a single bank account, a friendly society must:

(a) establish a benefit fund account in the records of each approved benefit fund;

(b) establish a control account in the records of the friendly society that records all the transactions in the bank account; and

(c) reconcile the aggregate of the benefit fund accounts kept in the records of each approved benefit fund with the control account.

28. In respect of a single bank account, a friendly society must ensure that the benefit fund account records all drawings from, and receipts by, the bank account to the extent that they relate to the respective approved benefit funds.

29. In respect of a single bank account, a friendly society must allocate to the approved benefit funds:

(a) income received from the bank account equitably in accordance with their interest in the bank account; and

(b) any costs to the approved benefit funds in accordance with their interest in the bank account.

30. Subject to paragraphs 31 and 32 the balancing between benefit fund accounts and the control account must be reconciled at least once every seven days, or at such other time as permitted by APRA.

31. In respect of a single bank account relating to unitised contracts, a friendly society must carry out the reconciliation referred to in paragraph 30 at least as frequently as when the unit prices relevant to the contract concerned are quoted, but in any event, at least once every seven days or at such other time as permitted by APRA.

32. In the case of a single bank account investment in respect of which a friendly society conducts a mark to market exercise on a more frequent basis than once every seven days, the reconciliation referred to in paragraph 30 must be carried out as least as frequently as the mark to market exercise.

Approval and amendment of benefit fund rules and consequential approval of a friendly society’s constitution

Adequate adoption

33. In respect of the benefit fund rule approvals and benefit fund rule amendments dealt with in this Prudential Standard, a friendly society must comply with the adequate adoption requirements under subsection 16B(2) of the Act and in doing so must give effect to the requirements set out in paragraphs 34 and 35.

34. For the purpose of subsection 16B(2) of the Act, a friendly society adopting new benefit fund rules, or adopting amendments to existing approved benefit fund rules, may only do so by:

(a) a special resolution of the members of the friendly society (or a class of members as determined by APRA) in accordance with section 9 of the Corporations Act 2001; or

(b) subject to paragraph 35, a resolution of the friendly society’s Board of directors.

35. In respect of a benefit fund rule amendment, a friendly society may make a resolution under subparagraph 34(b) if it provides reasons why adoption in this manner is appropriate and APRA is satisfied that:

(a) the amendment is authorised or required by the Act or any other law; or

(b) the amendment will not prejudice the rights of members who have an interest in the benefit fund; or

(d) the amendment is in relation to a restructure or termination of an approved benefit fund or funds under sections 52 and 53 of the Act, made in accordance with the requirements of this Prudential Standard.

Approval of benefit fund rules

36. Benefit fund rules may be approved by APRA subject to the requirements set out in section 16L of the Act and in this Prudential Standard.

37. An application to APRA for approval of benefit fund rules made under subsection 16L(1) of the Act must be made using ‘Form 1’ in this Prudential Standard.

38. After a friendly society’s benefit fund rules have been approved by APRA under subsection 16L(3) of the Act and have come into force under section 16N of the Act, the friendly society must give written notice to its members in accordance with the requirements set out in paragraphs 51 and 52.

Approval of amendment of approved benefit fund rules on initiative of friendly society

39. On application by a friendly society, amendment of approved benefit fund rules may be approved by APRA subject to the requirements set out in section 16Q of the Act and in this Prudential Standard.

40. An application for APRA’s approval to amend benefit fund rules pursuant to subsection 16Q(1) of the Act must be made using ‘Form 2’ in this Prudential Standard.

41. Subject to paragraph 42, after an amendment to a benefit fund’s approved benefit fund rules has been approved by APRA under section 16Q(3) of the Act and has come into force under section 16T of the Act, the friendly society must give written notice to its members in accordance with the requirements set out in paragraphs 51 and 52.

42. For the purposes of paragraph 41, notice is not required where:

(a) the approved benefit fund rules have been amended by a special resolution of the members in accordance with paragraph 34(a); or

(b) the amendment of the approved benefit fund rules is as a result of a restructure pursuant to section 52 of the Act or a termination pursuant to section 53 of the Act in which case notice must be given in accordance the applicable requirements in this Prudential Standard for restructures and terminations.

Approval of amendment of approved benefit fund rules as required by APRA

43. APRA may require a friendly society to amend approved benefit fund rules, subject to the requirements set out in section 16R of the Act and in this Prudential Standard.

44. Where the amendment of approved benefit fund rules has been determined by APRA under subsection 16R(4) of the Act and has come into force under section 16T of the Act, the friendly society must give written notice to its members in accordance with the requirements set out in paragraphs 51 and 52.

Approval of consequential amendments of a friendly society’s constitution on initiative of friendly society

45. On application by a friendly society, consequential amendments of a friendly society’s constitution may be approved by APRA subject to the requirements set out under section 16U of the Act and in this Prudential Standard.

46. An application for APRA’s approval of consequential amendments of a friendly society’s constitution made under subsection 16U(1) of the Act must be made using ‘Form 3’ in this Prudential Standard.

47. After consequential amendments of a friendly society’s constitution have been approved by APRA under subsection 16U(3) of the Act and have come into force under section 16X of the Act, the friendly society must give written notice to its members in accordance with the requirements set out in paragraphs 51 and 52.

Approval of consequential amendments of a friendly society’s constitution as required by APRA

48. APRA may require consequential amendments to be made to a friendly society’s constitution after adoption or amendment of benefit fund rules subject to the requirements set out in section 16V of the Act and in this Prudential Standard.

49. An application for APRA’s approval of consequential amendments of a friendly society’s constitution as required by APRA which is made under subsection 16V(3) of the Act must be made using ‘Form 4’ in this Prudential Standard.

50. After consequential amendments of a friendly society’s constitution as required by APRA have been approved by APRA under section 16V(4) of the Act or APRA gives the friendly society notice of amendments of the friendly society’s constitution that it has determined under section 16V(5) of the Act and the consequential amendments approved or determined by APRA have come into force under section 16X of the Act, the friendly society must give written notice to its members in accordance with the requirements set out in paragraphs 51 and 52.

Notice to members

51. Where notice to members is required in respect of matters dealt with in paragraphs 36 to 50, a friendly society must give written notice to its members, no later than the day on which notice is given of the next general meeting of the friendly society:

(a) stating the date on which the new benefit fund rule or the change to the benefit fund rule or society constitution came into force; and

(b) giving the text or a summary of the new benefit fund rule or of the change to the benefit fund rule or friendly society’s constitution.

52. With APRA’s prior approval, notice as referred to in paragraph 51, may be given to members by an advertisement published in a newspaper circulating generally in the area of each State or Territory in which the friendly society operates.

Restructure of approved benefit funds

53. Under section 52 of the Act, a friendly society may apply to APRA to restructure its approved benefit funds by making one or more policies that are referable to an approved benefit fund or benefit funds of the friendly society become referable to another benefit fund or benefit funds of the society (whether existing or proposed). An application for a restructure of an approved benefit fund under section 52 of the Act may only be made in accordance with this Prudential Standard.

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

(a) be made using ‘Form 5’ in this Prudential Standard; and

(b) be accompanied by the documents mentioned in the ‘Schedule 1 to Form 5’ in this Prudential Standard and be lodged with APRA at least 90 days, or such other period as APRA determines in writing, before the proposed date of restructure.

55. The applicant must, on request by APRA and within the time specified, produce to APRA 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 friendly society for the purposes of this Prudential Standard) including statements on the same matters as those required of the Appointed Actuary.

Approval of application for restructure of approved benefit funds

56. Subject to this Prudential Standard, APRA may approve an application by a friendly society for a restructure of its approved benefit funds.

57. APRA may refuse to approve an application by a friendly society for a restructure of its approved benefit fund or benefit funds if it considers that immediately after the restructure:

(a) a transferring fund; or

(b) a receiving fund

will not satisfy the requirements of LPS 110 and LPS 112.

58. In order for APRA to approve an application by a friendly society under paragraph 56, the friendly society must obtain consent for the restructure, in relation to each approved benefit fund that is involved in the restructure, by either:

(a) a special resolution, in accordance with section 9 of the Corporations Act 2001, by the members (or a class of members as determined by APRA) of each approved benefit fund that is involved in the restructure; or

(b) if APRA so determines, a resolution of the Board of directors of the friendly society.

59. A friendly society must, at least 21 days before a meeting of members to provide consent to a restructure under paragraph 58(a), give personally or by post to each member of the approved benefit fund:

(a) a copy of the documents mentioned in items 1, 2 and 6 of Schedule 1 to Form 5, or a summary of those documents, that has been approved by APRA in writing; and

(b) a notice of the meeting and the proposed special resolution in accordance with paragraph 58(a).

60. If a proposed restructure is approved to in accordance with paragraph 56, the friendly society must within 30 days of that consent:

(a) provide APRA with a copy of the resolutions made under paragraph 58; and

(b) apply to APRA for approval of, whichever of the following is applicable:

(i) benefit fund rules in accordance with section 16L of the Act;

(ii) a proposed amendment of its approved benefit fund rules in accordance with section 16Q of the Act; and

(iii) a proposed amendment of its constitution in accordance with section 16U of the Act.

Transfer of assets

61. Paragraphs 62 to 64:

(a) apply to all friendly societies other than those specified in paragraph 61(b); and

(b) do not apply to a friendly society where the restructure consists only of a transfer of all assets and liabilities from a single transferring approved benefit fund to a single receiving fund.

62. A friendly society 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.

63. 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.

64. 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;

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

(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 item 3 of Schedule 1 to Form 5; and

(ii) was approved by APRA as part of its approval under paragraph 56.

When restructure has effect

65. The restructure of approved benefit funds of a friendly society shall have effect when:

(a) benefit fund rules approved under section 16L of the Act come into force under section 16N of the Act to give effect to the restructure; and

(b) proposed amendments to the approved benefit fund rules of the friendly society under section 16Q of the Act to give effect to the restructure come into force under section 16T of the Act.

66. A friendly society to which paragraph 61(a) applies must comply with paragraphs 62 to 64 as soon as practicable after a restructure has taken effect under paragraph 65.

Effect of restructure

67. Upon a restructure of approved benefit funds of a friendly society having effect:

(a) a member of a transferring fund who is in a category specified in documents provided to APRA under paragraph 54(b) becomes a member of a receiving fund; and

(b) the assets and undertakings of, and liabilities referable to, the transferring fund become, to the extent specified in documents provided to APRA under paragraph 54(b), assets and undertakings of, and liabilities referable to, a receiving fund.

Notification of interested persons

68. A friendly society that restructures an approved benefit fund must, within six 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.

69. A notice under paragraph 68 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) a statement, in relation to each fund affected by the restructure, whether the restructure affects the whole or part of the fund;

(d) a summary of how the restructure affects the interests of policy owners of each fund; and

(e) details of:

(i) any proposed new benefit fund rules;

(ii) any proposed amendments to approved benefit fund rules; and

(iii) any proposed consequential amendments to the constitution of the friendly society

in order to recognise the restructure.

70. A notice under paragraph 69 must be accompanied by a document:

(a) describing (in summary form) the reasons for the restructure; and

(b) containing relevant extracts from any report by the Appointed Actuary on the proposed restructure under item 3 of Schedule 1 to Form 5 which deals with implications for policy owners.

71. APRA may grant an exemption, subject to any conditions it thinks fit, from any of the requirements of paragraphs 68 to 70, if it considers that notification in accordance with those paragraphs is not necessary.

Information to be lodged with APRA following a restructure

72. A friendly society must lodge with APRA within three months, or such other period as APRA determines in writing, after a restructure takes effect:

(a) audited accounts, or accounts in a form approved by APRA in writing, for each fund involved in the restructure up to the date that the restructure takes effect; and

(b) such other information as APRA may require.

73. The accounts in paragraph 72 must include, if applicable:

(a) details of any bonuses paid by the friendly society from any fund involved in the restructure and of any reserves retained by the friendly society in a fund during the period to which the accounts relate; and

(b) a statement of the manner in which the units of a transferring fund were converted to units of a receiving fund.

Termination of approved benefit funds

74. Under section 53 of the Act, a friendly society may apply to APRA to terminate an approved benefit fund of the friendly society. An application for a termination under section 53 of the Act may only be made in accordance with this Prudential Standard.

75. An application for the termination of an approved benefit fund must:

(a) be made using ‘Form 6’ in this Prudential Standard;

(b) except insofar as APRA otherwise determines in writing, be accompanied by the documents mentioned in ‘Schedule 1 to Form 6’ in this Prudential Standard; and

(c) be lodged with APRA at least 90 days, or such other period as APRA determines in writing, before the proposed date the termination is expected to take effect.

76. The applicant must, on request by APRA and within the time specified, produce to APRA 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 friendly society for the purposes of this Prudential Standard) including statements on the same matters as those required of the Appointed Actuary.

77. Subject to this Prudential Standard, APRA may approve an application under paragraph 74 by a friendly society for a termination of any of its approved benefit funds.

78. Before APRA can approve an application by a friendly society under paragraph 74, the friendly society must obtain consent for the termination, by either:

(a) a special resolution, in accordance with section 9 of the Corporations Act 2001, by the members (or a class of members as determined by APRA) of the approved benefit fund that is proposed to be terminated; or

(b) if APRA so determines, a resolution of the Board of directors of the friendly society.

79. A friendly society must, at least 21 days before a meeting of members to provide consent to a termination under paragraph 78, give personally or by post to each member of the approved benefit fund:

(a) a copy of the documents mentioned in items 1, 2 and 6 of Schedule 1 to Form 6, or a summary of those documents, that has been approved by APRA in writing; and

(b) a notice of the meeting and the proposed special resolution in accordance with paragraph 78.

80. If a proposed termination is approved to in accordance with paragraph 77, the friendly society must:

(a) cease to accept new members and any contributions from existing members in respect of the approved benefit fund; and

(b) distribute the assets of the approved benefit fund, within 12 months of that consent, in accordance with paragraph 81.

Distributions of assets of an approved benefit fund

81. The assets of an approved benefit fund must be applied in the following order:

(a) first:

(i) to pay benefits to any person entitled to a benefit from the approved benefit fund; or

(ii) as otherwise permitted by the Act or by the approved benefit fund rules;

(b) second:

(i) where the approved benefit fund rules of the approved benefit fund being terminated provide for the application of assets on the termination of the fund, in accordance with those approved benefit fund rules; or

(ii) in any other case, in satisfaction of any entitlements of members of the approved benefit fund as determined in writing by the Appointed Actuary; and

(c) third, if any assets remain after the application of paragraphs 81(a) and 81(b), by way of transfer to the management fund of the friendly society.

82. For the purposes of a determination under paragraph 81(b)(ii), the Appointed Actuary must take into account all the circumstances of the approved benefit fund, including:

(a) the requirements of the Act;

(b) the applicable approved benefit fund rules; and

(c) the history, performance and financial position of the fund during its existence, whether before or after it became an approved benefit fund under the Act.

Notification of members

83. A friendly society must, not later than the date of distribution of the assets of an approved benefit fund under paragraph 81, give written notice of the termination of the approved benefit fund to each member of the approved benefit fund.

84. A notice under paragraph 83 must include:

(a) the name of the approved benefit fund;

(b) the reasons for the termination of the approved benefit fund;

(d) a summary of how the termination affects the interests of members of the fund; and

(e) details of the proposed amendment of the approved benefit fund rules and, if applicable, the constitution of the friendly society, to recognise the termination of the approved benefit fund.

85. APRA may grant an exemption, subject to any conditions it thinks fit, from any of the requirements of paragraphs 83 or 84, if it considers that full notification in accordance with those paragraphs is not necessary.

Amendment of rules and constitution

86. If a friendly society has distributed assets in accordance with paragraph 81, the Board of directors of the friendly society must within 30 days of that distribution:

(a) resolve to amend the approved benefit fund rules and, if applicable, the constitution of the friendly society, in the manner set out in the document required to be given to APRA under item 4 of Schedule 1 to Form 6, to give effect to the proposed termination of the approved benefit fund;

(b) provide APRA with a copy of the resolutions made under this paragraph and paragraph 78;

(c) apply to APRA for approval of a proposed amendment of its approved benefit fund rules in accordance with section 16Q of the Act; and

(d) if applicable, apply to APRA for approval of any proposed amendment of its constitution in accordance with section 16U of the Act.

Information to be provided to APRA following a termination

87. A friendly society must lodge with APRA, within three months or such other period as APRA determines, after the termination of an approved benefit fund takes effect:

(a) audited accounts, or accounts in a form approved by APRA, for the terminated fund up to the date on which the termination takes effect; and

(b) such other information as APRA may require in writing.

88. The accounts referred to in paragraph 87 must include, if applicable:

(a) a statement of the distribution of the assets of the approved benefit fund; and

(b) details of any bonuses paid by the friendly society from the approved benefit fund during the period to which the accounts relate.

When termination has effect

89. A termination of an approved benefit fund of a friendly society has effect from when amendments to the approved benefit fund rules to give effect to the termination come into force under section 16T of the Act.

Unsecured borrowings of an approved benefit fund

90. For the purposes of subsection 38(4) of the Act, a friendly society must not borrow money by means of unsecured borrowing, for the purposes of the business of an approved benefit fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50 per cent of the free assets of the fund.

In relation to an approved benefit fund, ‘free assets’ means the excess of the capital base over the Prudential Capital Requirement for the fund as defined in LPS 110 and LPS 112.

Adjustments and exclusions

91. APRA may, by notice in writing to a life company, adjust or exclude a specific requirement in this Prudential Standard in relation to that life company.

Determinations made under previous prudential standards

92. An exercise of APRA’s discretion under a previous version of this Prudential Standard continues to have effect under this Prudential Standard.

Forms for use in relation to friendly society matters dealt with in this Prudential Standard

Form 1: Approval of friendly society benefit fund rules

Name and Australian business number of friendly society

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2. Name of proposed benefit fund

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3. The items outlined below must be attached to this form:

(a) particulars of projections of life insurance business to which the fund relates for:

(i) whichever is the greater of the following periods:

the period of the financing arrangements for that business; or
10 years; or

(ii) the period approved, in writing, by APRA;

(b) particulars of the proposed financing arrangements for the writing of new life insurance business to which the fund relates; and

(c) a report by the Appointed Actuary on the establishment of the benefit fund and the proposed benefit fund rules, in accordance with Attachment B of Prudential Standard CPS 320 Actuarial and Related Matters.

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. Certification

By signing this form the signatory certifies that:

(a) The procedural requirements for the passing of the resolution in accordance with this Prudential Standard were met. Please attach a copy of the resolution.

(b) The proposed benefit fund rules comply with the requirements of this Prudential Standard. Please attach a copy of the proposed new benefit fund rule for approval.

7. Signature

This form must be signed by either:

(a) the principal executive officer of the friendly society; or

(b) an officer of the friendly society 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. Form 2: Approval of amendment of approved benefit fund rules

Name and Australian business number of friendly society

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2. Name of the approved benefit fund for which the approved benefit fund rules are proposed to be amended

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3. Is actuarial advice in accordance Prudential Standard CPS 320 Actuarial and Related Matters required?

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If yes, a copy of the actuary’s advice must be attached to this form.

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. Certification

By signing this form the signatory certifies that:

(a) The procedural requirements for the passing of the resolution in accordance with this Prudential Standard were met. Please attach a copy of the resolution.

(b) The approved benefit fund rules, as proposed to be amended comply with the requirements of this Prudential Standard. A copy of the proposed benefit fund rule amendments must be attached including a copy of the existing rules “marked up” to show the proposed changes.

7. Signatures

This form must be signed by:

(a) the principal executive officer of the friendly society; or

Name Position title

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Signature Date

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

Form 3: Approval of consequential amendments of company’s constitution on initiative of a friendly society

Name and Australian business number of friendly society

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2. Reason/s for the consequential amendments to the constitution

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Attach extra pages if insufficient space

3. This application must be accompanied by one of the following; please indicate as applicable:

View image in the official source an application (Form 1) for approval of benefit fund rules under section 16L(2) of the Life Insurance Act 1995 (the Act); or

View image in the official source an application (Form 2) for approval of amendment of approved benefit fund rules under section 16Q(2) of the Act.

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 friendly society; or

Name Position title

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Signature Date

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

Form 4: Approval of consequential amendments of a company’s constitution as required by APRA

Name and Australian business number of friendly society

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2. 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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3. Address for correspondence

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

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4. Certification

By signing this form, the signatory certifies that the proposed consequential amendments rectify the deficiency referred to in the APRA notice given under section 16V(2) of the Life Insurance Act 1995.

5. Signatures

This form must be signed by:

(a) the principal executive officer of the friendly society; or

Name Position title

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Signature Date

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Please send completed form and accompanying documents to your responsible supervisor. Form 5: Restructure of approved benefit funds

Name and Australian business number of friendly society

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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 friendly society; or

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 5

Specified documents required to be lodged with Form 5

A statement of the nature of the proposed restructure and terms and conditions on which the restructure is to take place. The statement must, unless otherwise advised by APRA, include the following information:

(a) the name of each fund that is to be involved in the restructure, any proposed change in the name of any such fund and the proposed name of any new fund;

(b) the date from which the restructure is proposed to have effect;

(d) the effect of the proposed restructure on the interests of the members of each fund that is to be involved in the restructure;

(e) the assets and undertakings of, and liabilities referable to, each transferring fund that will become assets and undertakings of and liabilities referable to a receiving fund, in accordance with the report of the Appointed Actuary given under item 3 of this Schedule;

(f) the category or categories of members of each transferring fund that, under the restructure, will become members of a receiving fund;

(g) any interest that any officer of the society has in the proposed restructure;

(h) any compensation or other consideration proposed to be paid, or any other incentive proposed to be given, to any officer or member of the society in relation to the proposed restructure;

(i) if applicable, an estimate of the rate of any bonuses payable from each fund up to the date on which it is proposed that the restructure will take effect;

(j) in the case of a transfer of part of a fund, details of any reserves that the society proposes to retain in the fund in accordance with the recommendations of the Appointed Actuary;

(k) whether there has been any material change to the financial position of the fund since the date at which the profit and loss statements or balance sheets were prepared under item 2 of this Schedule; and

(l) such other information as APRA requires.

2. Unless APRA determines in writing that they are not required, the most recent audited:

(a) profit and loss statement; and

(b) balance sheet

prepared in accordance with the relevant reporting standards applicable to friendly societies made by APRA under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 for each fund that is to be involved in the restructure, provided that they were prepared at a date no earlier than six months before the date of the application under paragraph 53 of this Prudential Standard.

3. A report by the Appointed Actuary on the proposed restructure, including:

(a) in relation to a restructure that does not consist of a transfer of all the assets and liabilities from a single transferring fund to a single receiving fund:

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

(ii) a statement as to whether the assets to be transferred are appropriate to the liabilities to be transferred;

(b) a 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

(c) a statement as to whether, immediately after the restructure, a transferring fund and receiving fund will satisfy the requirements of LPS 110 and LPS 112.

4. A copy of:

(a) any proposed new benefit fund rules;

(b) any proposed amendments to approved benefit fund rules; and

(c) any proposed consequential amendments to the constitution of the friendly society in order to recognise the restructure.

5. A copy of the notice proposed to be issued by the friendly society to notify members of each fund involved in the restructure, as required by paragraph 68 of this Prudential Standard.

6. A certificate signed by the directors of the friendly society certifying that, having regard to all matters relevant to the proposed restructure, the directors consider that the restructure would be in the interests of the members of each fund that is to be involved in the restructure.

Form 6: Termination of approved benefit funds

Name and Australian business number of friendly society

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2. Name of the approved benefit fund that the friendly society proposes to terminate

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3. Date from which the approved benefit fund termination is proposed to take effect

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4. 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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5. 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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Address for correspondence

View image in the official sourcePlease provide the address to which correspondence relating to this application should be mailed.

7. Signatures

This form must be signed by:

(a) the principal executive officer of the friendly society; or

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 6

Specified documents required to be lodged with Form 6

A statement of the nature of the proposed termination and the terms and conditions on which the termination is to take place. Unless otherwise advised by APRA in writing, the statement must include the following information:

(a) the name of the approved benefit fund that is proposed to be terminated;

(b) the date from which the termination is proposed to have effect;

(d) the manner in which the friendly society intends to distribute the assets of the approved benefit fund that is to be terminated;

(e) the effect of the proposed termination on the interests of the members of the approved benefit fund;

(f) any interest that any officer of the friendly society has in the proposed termination;

(g) any compensation or other consideration proposed to be paid, or any other incentive proposed to be given, to any officer or member of the friendly society in relation to the proposed termination;

(h) whether there has been any material change to the financial position of the approved benefit fund since the date at which the profit and loss statement or balance sheet were prepared under item 2 of this Schedule; and

(i) such other information as APRA requires in writing.

2. Unless APRA determines in writing that they are not required, the most recent audited:

(a) profit and loss statement; and

(b) balance sheet

prepared in accordance with the relevant reporting standards applicable to friendly societies made by APRA under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 for each fund that is to be involved in the termination, provided that they were prepared at a date no earlier than six months before the date of the application under paragraph 74 of this Prudential Standard.

3. A certificate signed by the Appointed Actuary certifying that, having regard to all matters relevant to the proposed termination, the actuary considers that the termination would be in the interests of the members of the approved benefit fund.

4. A copy of:

(a) proposed amendments to the approved benefit fund rules; and

(b) any proposed consequential amendments to the constitution of the friendly society

in order to recognise the termination of the approved benefit fund.

5. A copy of the notice proposed to be issued by the friendly society to notify members of the approved benefit fund of the proposed termination of the approved benefit fund, as required by paragraph 83 of this Prudential Standard.

6. A certificate signed by the directors certifying that, having regard to all matters relevant to the proposed termination, the directors consider that the termination would be in the interests of the members of the approved benefit fund.

[1] Refer to section 3(3) of the Act.

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Life insurance (prudential standard) determination No. 1 of 2019

Prudential Standard LPS 700 Friendly Society Benefit Funds

Life Insurance Act 1995

I, Pat Brennan, delegate of APRA:

This instrument takes effect on 1 July 2019.

Dated: 17 April 2019

[Signed]

Pat Brennan

Executive General Manager

Policy and Advice Division

Interpretation

In this Determination:

APRA means the Australian Prudential Regulation Authority.

friendly society has the meaning given in section 16C of the Act.

life company has the meaning given in the Dictionary to the Act.

Schedule

Prudential Standard LPS 700 Friendly Society Benefit Funds comprises the 35 pages commencing on the following page.

Prudential Standard LPS 700

Friendly Society Benefit Funds

Table of Contents

Authority

Application

Interpretation

Approved benefit fund rules: Paragraph 5 requires a friendly society to have approved benefit fund rules that adequately address a specific list of items for each approved benefit fund. The list is prescriptive and includes the fund name, terms and conditions of operation, nature of the business, contribution rates including minimums, method of benefit determination and notice periods, guaranteed benefits, membership, authorised investments, designation as defined contribution or defined benefit, costs and expenses that may be charged to the fund, taxation effects and the ability to transfer funds or distribute surplus (paragraph 5(a)-(m)).

Classification of funds: Paragraphs 6 to 10 create a binary classification duty. Each approved benefit fund must be classified as either 'defined contribution' or 'defined benefit'. The standard sets out default characterisations: defined contribution where benefits derive from member contributions and investment performance (paragraph 7(a)); defined benefit where benefits are specified or determined by a formula in the rules and are not directly tied to fund assets or investment performance (paragraph 7(b)). Where funds present mixed characteristics the dominant characteristic determines classification (paragraph 8). Friendly societies may apply to APRA for a written classification determination (paragraph 9) and APRA may itself determine classification by written notice (paragraph 10). That creates administrative routes and a regulator upstream control on classification.

Surplus treatment and Appointed Actuary advice: Paragraph 11 requires the board to seek and consider written advice from the Appointed Actuary before making any allocation or distribution of surplus under the modified subsection 56(3) regime. The Appointed Actuary’s advice must cover the effects on LPS 110/LPS 112 compliance, consistency with member representations, the level of unallocated surplus relative to liabilities, intergenerational equity concerns, fairness across members, the role of management fund fees in surplus creation, effects on the finances of the fund and friendly society and probable future surplus generation (paragraph 11(a)-(i)). Paragraphs 12 and 13 specify different constraints for defined contribution and defined benefit funds. Notably, for defined contribution funds, surplus may not be distributed to the management fund and must be allocated to members or retained as unallocated surplus unless the rules expressly allow transfers (paragraph 12).

Seed capital: Paragraphs 14 to 16 permit a transfer from the management fund to an approved benefit fund as 'seed capital' only with prior written APRA approval; seed capital may be included as an asset under LPS 112 for meeting LPS 110 requirements. Repayment is constrained: repayments are not permitted unless the receiving fund continues to meet LPS 110/LPS 112 after repayment and if interest paid to the management fund does not exceed the fund’s earning rate for the period the seed capital was in the fund (paragraph 15). Seed capital that is a receivable must be deducted from management fund net assets under LPS 112 (paragraph 16).

Pooling and accounting controls: The standard prescribes stringent recordkeeping and reconciliation for joint investments (paragraphs 19-25) and single bank accounts that hold assets of multiple funds (paragraphs 26-32). For joint investments, friendly societies must set up separate contributing fund accounts in records, keep a joint investment register, reconcile aggregate accounts with the register at least once every seven days (or more often for unitised contracts or mark to market regimes) and ensure investments are readily able to be liquefied and that investment decisions for one contributing fund do not directly affect other contributing funds (paragraphs 20-25). Single bank accounts require benefit fund accounts, a control account and similar reconciliation frequency (paragraphs 27-32).

Restructure and termination processes: The standard sets out detailed application, documentation, timing and member consent regimes for restructures under section 52 of the Act (paragraphs 53-73 and Form 5 with Schedule 1) and terminations under section 53 (paragraphs 74-89 and Form 6 with Schedule 1). Both require significant documentary material, actuarial reports, member notices and in most cases either a special resolution by members or, where APRA permits, board resolution (paragraphs 58-59 and 78-79). The standard prescribes transfer valuation methods (paragraphs 62-64), notice content to policy owners and members after restructures (paragraphs 68-70) and the order of priority for distributing assets on termination (paragraph 81).

Unsecured borrowings and capital metrics: For unsecured borrowing under subsection 38(4) of the Act, paragraph 90 caps principal outstanding under unsecured borrowing at 50 per cent of the free assets of the approved benefit fund. It defines 'free assets' as the excess of the capital base over the Prudential Capital Requirement for the fund as specified in LPS 110 and LPS 112.

APRA discretion and transitional matters: APRA may adjust or exclude a specific requirement in relation to a life company (paragraph 91). Paragraph 92 preserves the continuing effect of APRA discretionary exercises under previous versions of the standard.

Forms and certified material: The Standard embeds six forms (Forms 1-6) and schedules that set out required attachments, certification requirements and the officers required to sign applications. Those forms specify the attachments APRA expects, such as Appointed Actuary reports prepared in accordance with CPS 320, audited financial statements, directors' certificates and draft notices to members.

Primary regulated entities: The standard expressly applies to life companies that are friendly societies pursuant to section 16A of the Life Insurance Act 1995 (paragraph 2). The instrument’s interpretation defines APRA and refers to 'friendly society' as per section 16C of the Act and 'life company' as per the Dictionary to the Act (Interpretation preamble to the Schedule). Therefore all friendly society life companies that maintain approved benefit funds fall within the regime.

Members and policy owners: Members of approved benefit funds and owners of policies referable to funds are directly affected by the rules on fund structure, surplus allocation, restructures and terminations. The standard requires specific notices to members and policy owners in connection with approvals, restructures and terminations (paragraphs 51-52, 59, 68-71 and 83-84). For defined contribution funds, members have a protected interest in any surplus, because paragraph 12 prohibits distribution of surplus from DC funds to the management fund and requires allocation to members or retention as unallocated surplus.

Boards and senior officers of friendly societies: The board must ensure approved benefit fund rules contain the items in paragraph 5, must seek and consider Appointed Actuary advice before any surplus allocation or distribution (paragraph 11), and must follow the adoption procedures for benefit fund rules under subsection 16B(2) of the Act with the additional requirements in paragraphs 33-35 (adequate adoption). Boards are required to make certain resolutions within set timeframes following distributions or terminations (paragraph 86).

Appointed Actuary and independent actuaries: The Appointed Actuary is central. The board must obtain written advice from the Appointed Actuary before surplus allocations (paragraph 11) and Appointed Actuary reports are required as attachments to Form 1 and to restructuring and termination applications (Forms and Schedules). Where requested by APRA, the applicant must provide a report by an independent actuary approved by APRA and paid for by the friendly society (paragraphs 55 and 76). The standard also requires Appointed Actuary certification statements as part of the documentation for terminations (Schedule 1 to Form 6 item 3).

Management fund and other funds: The management fund is affected by tight controls on transfers and seed capital. Paragraph 12 restricts transfers of surplus from defined contribution funds to the management fund and paragraph 14 requires APRA written approval for seed capital transfers from the management fund into approved benefit funds, with repayment constraints in paragraph 15. Management fund net assets must be adjusted for receivable seed capital under paragraph 16.

Auditors, accountants and external advisers: The standard requires audited financial statements as attachments to restructuring or termination applications unless APRA determines otherwise (Schedule 1 to Form 5 item 2 and Schedule 1 to Form 6 item 2). Actuarial work must comply with CPS 320 where specified. Preparers of notices and recordkeepers must meet the content and timing requirements set out for member communications and reconciliations.

APRA: The Australian Prudential Regulation Authority is the decision maker for approvals, amendments and exemptions. APRA has express powers to: approve, refuse or require amendments to benefit fund rules and constitution changes (paragraphs 36, 39, 43, 45, 48); determine fund classification (paragraph 10); require restructures or terminations to meet capital standards (paragraph 57); require additional documentation or independent actuarial reports; grant exemptions subject to conditions (paragraphs 71 and 85); and issue notices adjusting or excluding specific requirements for particular life companies (paragraph 91). The regulator therefore controls significant gates and the pace of structural changes.

Other stakeholders: The requirements for notices to policy owners and member voting procedures mean that a friendly society’s members, including classes of members determined by APRA, are stakeholders in material fund changes (paragraphs 34, 58, 59). Superannuation entities are carved out from some rules: paragraph 18(b) exempts amounts payable by a friendly society as trustee for a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act 1993, which creates an interaction with superannuation regulation for trusteeship arrangements.

Duties to maintain approved benefit fund rules and their content: Paragraph 5 imposes a duty on friendly societies to have approved benefit fund rules that adequately provide for a specified set of operational, rights and governance items for each approved benefit fund. That is a standing duty and ties directly into APRA’s approval powers under section 16L of the Act, referenced in paragraphs 36 and 37 which set out application form requirements.

Classification duty: Paragraph 6 imposes an affirmative duty to classify each approved benefit fund as either defined contribution or defined benefit. Paragraph 7 provides the characterisations to guide that duty. Where characteristics are mixed, paragraph 8 requires classification by dominant characteristic. Friendly societies also have the procedural right to apply to APRA for a written determination of classification (paragraph 9). APRA has the corresponding power to determine classification by written notice (paragraph 10).

Appointed Actuary consultation and content obligations: Before any allocation or distribution of surplus under the modified section 56 regime, the board must obtain and consider written advice from the Appointed Actuary (paragraph 11). The Appointed Actuary’s advice must explicitly cover effects on compliance with capital standards LPS 110/LPS 112, representations to members, magnitude of unallocated surplus relative to liabilities, intergenerational equity, fairness across member classes, contribution provenance of surplus, financial effects and likely future surplus. That duty places a practical reporting, timing and content burden on the Appointed Actuary and the board’s decision‑making process.

Distribution and allocation constraints: For defined contribution funds, paragraph 12(b) requires that any surplus must be either allocated or distributed to members or retained as unallocated surplus and prohibits distribution of surplus to the management fund. Transfers from a DC fund to the management fund are only allowed if the approved benefit fund rules expressly permit them and such transfers exclude surplus (paragraph 12(c)). For defined benefit funds paragraph 13 permits distribution to members, the management fund, or another approved benefit fund in accordance with the rules.

Seed capital rights and constraints: Friendly societies have the right to transfer seed capital from the management fund into an approved benefit fund with APRA’s prior written approval (paragraph 14). However repayment is restricted: repayment cannot occur unless the receiving fund continues to meet LPS 110 and LPS 112 post‑repayment and if the interest paid to the management fund does not exceed the fund’s earnings rate over the seed capital period (paragraph 15). The management fund must have any receivable seed capital deducted from net assets under LPS 112 (paragraph 16).

Controls and recordkeeping duties for pooled arrangements: Friendly societies may engage in joint investments of two or more approved benefit funds only in accordance with subsection 16H(4A) of the Act and paragraphs 19 to 25. They must create joint investment accounts per contributing fund, keep a joint investment register, reconcile accounts at least once every seven days or at the frequency APRA permits, allocate income and direct redemption costs equitably, ensure investments are readily liquefiable and that investment decisions for one contributing fund do not affect other contributing funds (paragraphs 20-24). Similar duties apply for single bank accounts (paragraphs 26-32).

Approval, adoption and member consent duties: Paragraphs 33 to 52 set duties for adequate adoption of new rules or amendments under subsection 16B(2) of the Act, specifying methods of adoption: a special resolution of members (Corporations Act section 9) or, subject to APRA approval, a board resolution (paragraph 34). Paragraph 35 sets conditions for board adoption of benefit fund rule amendments. APRA approval is required for benefit fund rules (paragraph 36) using Form 1 (paragraph 37) and for amendments using Form 2 (paragraph 40). Notices to members must be given under strict timing and content rules (paragraphs 51-52).

Restructure and termination procedural rights and duties: Friendly societies have the right to apply to restructure or terminate approved benefit funds under sections 52 and 53 of the Act respectively, but must comply with the Standard’s processes including lodgement periods (90 days by default, paragraphs 54 and 75), documentation requirements (Forms 5 and 6 and their Schedules), Appointed Actuary reports and, where required by APRA, independent actuary reports (paragraphs 55 and 76). Member consent by special resolution is generally required unless APRA determines otherwise; APRA may require board approval in lieu (paragraphs 58 and 78).

APRA enforcement powers and discretions: APRA may refuse approvals if it considers that transferring or receiving funds will not satisfy LPS 110/LPS 112 immediately after a restructure (paragraph 57). APRA can require amendments (paragraph 43), determine classifications (paragraph 10), approve or disapprove restructures and terminations (paragraphs 56 and 77), and grant exemptions subject to any conditions it thinks fit (paragraphs 71 and 85). Paragraph 91 allows APRA to adjust or exclude specific requirements for particular life companies.

Recordkeeping and reporting duties: Frequent reconciliations for joint investments and single bank accounts are required (paragraphs 23 and 30), audited accounts or APRA‑approved accounts must be lodged after restructures and terminations within three months or as APRA allows (paragraphs 72 and 87), and various forms must be signed by the principal executive officer or an authorised officer (Forms 1-6 certification and signature clauses).

Rights to notice and consultation: Members and policy owners have rights to receive notices of new rules or amendments (paragraphs 51-52), to receive specified documents at least 21 days before a meeting seeking consent for restructures or terminations (paragraphs 59 and 79), and to receive notice following restructures (paragraphs 68-70) and terminations (paragraphs 83-84).

The Prudential Standard itself sets prescriptive obligations, approvals and timeframes but does not specify statutory fines or criminal penalties within the text of the Standard. Enforcement and remedial action flow from APRA’s regulatory powers under the Life Insurance Act 1995 and the approval/consent infrastructure embedded in the Standard.

APRA control points and consequences: APRA is given explicit decision rights in multiple places. It approves or refuses benefit fund rules and amendments (paragraphs 36 and 39), may require amendments to approved benefit fund rules (paragraph 43), may approve or refuse restructures and terminations (paragraphs 56 and 77), and may determine fund classification (paragraph 10). Refusal of approval prevents the new rules, amendment, restructure or termination from taking effect under the Act. Paragraph 57 makes explicit that APRA may refuse restructure applications if a transferring or receiving fund will not meet LPS 110 and LPS 112 immediately after a restructure. Paragraphs 71 and 85 give APRA the power to grant exemptions from notice requirements, subject to conditions.

Administrative and supervisory tools: The Standard requires extensive filings and certifications that provide APRA visibility and audit trails: Appointed Actuary reports, independent actuary reports on request, audited accounts or APRA‑approved accounts to be lodged within three months after restructures or terminations (paragraphs 72 and 87), and copies of resolutions within 30 days (paragraph 60 and paragraph 86(b)). These create supervision points where APRA may follow up for compliance. Form certification by the principal executive officer or authorised officer is required for all applications (Forms 1-6). APRA’s ongoing supervision power includes paragraph 91 allowing APRA to adjust or exclude specific requirements for particular life companies.

No new criminal offences specified in the Standard: The Standard does not create or prescribe criminal offences or monetary penalty amounts itself. Any enforcement measures linked to contraventions of statutory duties would arise under the Life Insurance Act 1995 and other applicable legislation, not from text within this Prudential Standard. Where the Standard requires actions that enable APRA to assess compliance, failure to comply with the Act or APRA determinations may attract statutory consequences under the Act, but those are not detailed in this instrument.

Discretionary relief and conditional exemptions: APRA may grant exemptions from notification requirements in restructures and terminations (paragraphs 71 and 85). Paragraph 91 also allows specific adjustment or exclusion of requirements for an individual life company by APRA notice in writing. These are supervisory tools that reduce the practical burden where APRA is satisfied that the prescribed process is unnecessary or inappropriate, subject to conditions APRA may impose.

Practical enforcement mechanics: The Standard’s enforcement is therefore primarily administrative and supervisory. APRA enforces by controlling approvals, imposing conditions on approvals, requiring additional documentation, and by exercising powers under the Act to require amendments or take broader regulatory action if statutory breaches arise. The Standard increases APRA’s visibility into friendly society fund operations through mandatory actuarial and audited reporting, reconciliation regimes and prescribed notice and documentation requirements.

Life Insurance Act 1995: The Prudential Standard is made under paragraph 230A(1)(a) of the Life Insurance Act 1995 (paragraph 1). Many of the Standard’s obligations and procedural steps operate by reference to the Act. The Standard applies specifically to life companies that are friendly societies pursuant to section 16A of the Act (paragraph 2) and uses numerous procedural hooks in the Act: subsection 16B(2) (adequate adoption), subsection 16H (joint investments and single bank accounts), sections 16L, 16Q, 16R, 16U, 16V and sections 52 and 53 concerning approvals, amendments, restructures and terminations (see paragraphs 33-50 and the restructure/termination parts). The Standard also refers to a modified subsection 56(3) of the Act for surplus allocation rules (paragraph 11).

Corporations Act 2001: The Standard requires special resolutions in accordance with section 9 of the Corporations Act 2001 for member approvals in multiple contexts (paragraphs 34, 58 and 78). That imports the Corporations Act voting and procedural rules for special resolutions when members must approve benefit fund rules, restructures or terminations.

LPS 110 and LPS 112 (prudential standards): The Standard explicitly links surplus decisions and seed capital calculations to Prudential Standard LPS 110 Capital Adequacy and LPS 112 Capital Adequacy: Measurement of Capital. Paragraph 11(a) requires the Appointed Actuary to advise on the effect of proposed allocations or distributions on compliance with LPS 110 and LPS 112. Paragraphs 14-16 treat seed capital and its treatment in net assets in line with LPS 112. Paragraph 90 defines free assets in relation to LPS 110 and LPS 112. Thus capital adequacy standards operate as binding constraints on restructures, surplus distributions and borrowing.

CPS 320 Actuarial and Related Matters: The Standard relies on actuarial work prepared in accordance with Prudential Standard CPS 320. Forms and Schedules require Appointed Actuary reports to comply with Attachment B of CPS 320 or CPS 320 more generally (see Form 1 item 3 and Schedule requirements for restructures and terminations). This integrates actuarial standards, qualifications and report formats into the approval process.

Superannuation Industry (Supervision) Act 1993: Paragraph 18(b) exempts amounts payable by a friendly society when it acts as trustee for a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act 1993 from the restriction in paragraph 17. That identifies an interaction between trust obligations under SISA‑regulated superannuation and the approved benefit fund rules.

Financial Sector (Collection of Data) Act 2001: The Schedules to Forms 5 and 6 require audited profit and loss statements and balance sheets prepared in accordance with reporting standards applicable to friendly societies made by APRA under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (Schedule 1 to Form 5 item 2 and Schedule 1 to Form 6 item 2). That brings statutory data collection and reporting standards into the evidence base APRA requires.

Corporations and trust law: While not referred to explicitly beyond the Corporations Act special resolution requirement, aspects of the Standard,such as fiduciary duties of directors, trust duties where the friendly society is trustee for a superannuation entity, and statutory duties under company law concerning disclosure and shareholder/member meetings,will interact in practice with the Standard’s adoption and notice provisions. The Standard prescribes notice content and timing that must fit into the procedural frameworks under corporate law when member meetings are convened.

Prudential and regulatory hierarchy: The Standard operates within APRA’s prudential framework. It prescribes operational and governance requirements that interact with capital adequacy rules, actuarial standards and statutory provisions in the Life Insurance Act. APRA retains supervisory discretion to adjust requirements for a particular life company (paragraph 91), meaning the Standard provides both a baseline and a mechanism for case‑by‑case modification under existing statutory powers.

Revocation and replacement: The instrument that introduced this text, dated 17 April 2019 and signed by Pat Brennan as delegate of APRA, revokes Life Insurance (prudential standard) determination No. 16 of 2012, including Prudential Standard LPS 700 Friendly Society Benefit Funds made under that determination, and determines Prudential Standard LPS 700 Friendly Society Benefit Funds in the form set out in the Schedule (instrument preamble). The instrument takes effect on 1 July 2019 (instrument preamble).

Continuity of prior discretions: Paragraph 92 of the Standard expressly states that an exercise of APRA’s discretion under a previous version of the Prudential Standard continues to have effect under this Prudential Standard. That is a transitional saving for prior approvals or discretionary determinations made by APRA.

No amendment narrative within the text: The text supplied does not include an explanatory memorandum, second reading speech text, or amendment log inside the Standard. It records only the revocation of the 2012 determination and the creation of the 2019 Determination. The instrument’s front matter records the delegate, date and effective date but does not enumerate incremental changes from 2012 to 2019 in‑text.

Forms and schedule continuity: The Standard embeds updated Forms 1-6 and their Schedules. Those forms are part of the Determination and replace prior forms associated with the 2012 Determination. The Standard references contemporary prudential instruments such as LPS 110, LPS 112 and CPS 320, implying alignment with more recent prudential architecture.

APRA discretion for future amendments: Paragraph 91 allows APRA to adjust or exclude a specific requirement in relation to a life company by written notice. That provides APRA a mechanism to alter how the Standard applies to a particular entity without amending the Standard instrument itself. Broader amendments to the Standard would be effected by a new APRA Determination under the Life Insurance Act 1995, pursuant to the same instrument‑making power used to adopt this Standard (paragraph 1).

No statutory amendment history recorded in the text: The provided instrument does not record any legislative amendments to the Life Insurance Act or related prudential standards that prompted this Determination. Any subsequent or antecedent statutory amendments would need to be sourced outside this text. The Standard does, however, reference external standards and statutes that may be updated independently of the Standard.

The Prudential Standard text supplied contains no references to judicial or administrative litigation, and no cases are cited or discussed in the instrument. Paragraph 92 preserves APRA discretionary acts made under prior versions of the Standard; however, the instrument does not include or summarise any legal disputes arising from those prior exercises of discretion.

Because the Standard is a prudential instrument setting regulatory obligations, disputes about its interpretation or APRA’s exercise of power would arise in courts or tribunals only if litigated under the Life Insurance Act 1995 or general administrative law. The Standard itself does not record any decisions, appeals or court outcomes.

Users seeking litigation precedent or contested interpretations should therefore look beyond the Standard to case law under the Life Insurance Act, judicial review decisions concerning APRA discretion, or disputes in which the content or application of prior friendly society prudential standards were challenged. Those materials are not part of the instrument text and are not referenced in the Standard.

Classification ambiguity and APRA override: The classification rule in paragraphs 6-8 requires a fund to be classified as either defined contribution or defined benefit. Where a fund exhibits mixed characteristics paragraph 8 requires classification by the dominant characteristic. That leaves room for subjective assessment and makes APRA’s role material because friendly societies may apply for a written determination (paragraph 9) and APRA may itself determine classification by notice (paragraph 10). Practical implication: classification affects surplus treatment and permitted transfers; divergent views between a friendly society and APRA about dominant characteristics will require APRA engagement and could change permissible distributions and transfers.

Strict surplus constraints for defined contribution funds: Paragraph 12(a) prohibits distribution of surplus from defined contribution funds to the management fund. Paragraph 12(c) permits transfers (excluding surplus) to the management fund only where the approved benefit fund rules expressly provide for such transfers. That limits managerial flexibility and requires explicit rule drafting at product design or amendment stage. A gotcha arises if historic rules do not expressly allow fee transfers; societies cannot rely on implied authority to effect transfers without rule change and APRA approval.

Comprehensive Appointed Actuary advice requirements: Before any surplus allocation or distribution the board must obtain written advice from the Appointed Actuary that addresses nine specific matters including capital adequacy impacts and intergenerational equity (paragraph 11). Failure to obtain that advice, or to have advice adequately cover all points, can delay or invalidate distributions. Appointed Actuaries and boards must plan lead times to coordinate advice, board consideration and APRA interactions.

Seed capital repayment traps: Paragraph 15 imposes two specific repayment constraints. Repayment is not permitted unless the approved benefit fund continues to meet LPS 110 and LPS 112 and if interest paid to the management fund does not exceed the earning rate of the approved benefit fund during the period seed capital was invested. That second condition can produce an accounting trap where interest conventions or different measurement bases yield an interest cost higher than the fund’s earned return, thereby preventing repayment even if capital adequacy is restored.

High frequency reconciliation requirements for pooled arrangements: Joint investments and single bank accounts require reconciliations at least once every seven days (paragraphs 23 and 30) or more frequently where unitised contracts have quoted unit prices or where mark to market exercises occur more often (paragraphs 24-25 and 31-32). Operational gotcha: smaller friendly societies outsourcing investment administration must ensure service arrangements support the required reconciliation frequency and joint investment register and control account mechanics.

Restructure and termination timetable and documentation burdens: Applications for restructures and terminations generally must be lodged at least 90 days before the proposed effective date (paragraphs 54 and 75). Schedules to Forms 5 and 6 require audited financial statements prepared within six months of the application, Appointed Actuary reports that address valuation methods and fairness issues, directors’ certificates, drafts of member notices, and more (Schedules 1 to Forms 5 and 6). On top of APRA’s ability to request independent actuary reports (paragraphs 55 and 76), a friendly society faces considerable evidentiary and timing constraints that can slow restructures or terminations.

Member consent complexity and APRA substitution of board resolution: While the standard anticipates member special resolutions (paragraphs 34, 58 and 78), paragraph 35 and paragraphs 58 and 78 allow APRA to accept board resolutions in lieu of member special resolutions in certain circumstances. That mixes governance expectations: where member consent is bypassed at APRA’s direction, societies should anticipate arguments from members about process, even if APRA legally substituted board approval under the Act and Standard.

Unsecured borrowings cap tied to prudential capital metrics: Paragraph 90 caps unsecured borrowing principal at 50 per cent of a fund’s free assets, where free assets are defined relative to capital base and the Prudential Capital Requirement under LPS 110/LPS 112. A practical gotcha is that fluctuations in capital metrics can move borrowing headroom materially and unexpectedly; friendly societies must monitor capital metrics, not just cash flows, when planning unsecured borrowing.

APRA’s ability to adjust or exclude requirements: Paragraph 91 allows APRA to adjust or exclude a specific requirement in relation to a life company. That is a supervisory lever that may create regulatory differentiation; societies should not assume universal application of any single paragraph without checking whether APRA has issued a tailored notice.

Form certification and signing authority: All forms require certification and signature by the principal executive officer or an authorised officer notified in writing to APRA (Forms 1-6). Failure to meet this requirement, or to maintain up‑to‑date notification of authorised signatories, can result in procedural defects in submissions.

Documentation content traps: Notices to members and policy owners must include specified content (paragraphs 51-52, 68-70 and 83-84). Drafts of these notices must be provided with applications. Errors or omissions in notice content or timings can trigger APRA queries, member challenges or delays to approvals.

Governance and documentation framework

Approved benefit fund rules: Ensure each approved benefit fund has approved benefit fund rules that expressly cover the items in paragraph 5(a)-(m). Map each required item to a clause in the rules and retain an indexed compliance matrix. That includes express drafting on whether the fund is defined contribution or defined benefit (paragraph 5(i)) and whether transfers or surplus distributions to the management fund are permitted (paragraph 5(l)-(m)).
Adoption procedures: Follow the adequate adoption requirements under subsection 16B(2) as amplified by paragraphs 33-35. Where relying on board adoption under paragraph 34(b) for rule amendments, prepare a written justification for why board adoption is appropriate and, where applicable, secure APRA’s prior satisfaction under paragraph 35(a)-(d). Maintain records of resolutions and attach them to Form submissions.

Actuarial and capital compliance

Appointed Actuary engagement: For any proposed surplus allocation or distribution, obtain written advice from the Appointed Actuary covering the matters in paragraph 11(a)-(i). Ensure the Appointed Actuary follows CPS 320 attachment requirements where referenced in Forms and Schedules. Maintain turnaround time assumptions for actuarial work so boards can obtain and consider advice before decisions.
Independent actuary readiness: For restructures or terminations, prepare to provide an independent actuary report on APRA’s request (paragraphs 55 and 76). Maintain a panel of actuaries with APRA approval or the ability to obtain approval quickly and allocate budget for external actuarial work.

Operational controls and accounting

Seed capital approvals and accounting: Do not transfer seed capital from the management fund to an approved benefit fund without prior written APRA approval (paragraph 14). Before any proposal to repay seed capital confirm the two repayment conditions in paragraph 15 are met: post‑repayment compliance with LPS 110/LPS 112 and that interest paid has not exceeded the fund’s earning rate while the seed capital was invested. Record seed capital receivables in management fund accounts and deduct them from net assets in accordance with LPS 112 as required by paragraph 16.
Joint investment and single bank account regimes: Where assets of multiple funds are pooled, implement the specific book entries and registers required by paragraphs 20-21 and 27-28. Establish a joint investment register and per‑fund joint investment accounts that reconcile to a central register; set up a central control account for single bank accounts and per-fund benefit fund accounts. Document the allocation rules for income and cost sharing as per paragraphs 22 and 29. Operationalise reconciliation processes to meet the minimum frequency (at least weekly) and more frequently for unitised contracts or where mark to market is more frequent (paragraphs 23-25 and 30-32).

Approvals, applications and timing

Forms and attachments: Use Forms 1-6 as prescribed for applications to APRA (paragraphs 37, 40, 46, 49, Form 5 and Form 6). Attach the required documents listed in the Schedules: Appointed Actuary reports per CPS 320, audited P&L and balance sheets prepared under APRA reporting standards (Schedule 1 to Forms 5 and 6 item 2), directors’ certificates, draft notice text, and other items enumerated in Schedule 1 to Form 5 and Schedule 1 to Form 6.
Lead times and notice periods: For restructures and terminations, lodge applications at least 90 days before the proposed date unless APRA specifies otherwise (paragraphs 54 and 75). Provide members with the specified documents at least 21 days before a meeting to obtain consent (paragraphs 59 and 79). If a restructure is approved, provide APRA with copies of resolutions within 30 days and apply for any required rule or constitution amendments (paragraph 60). For any new approved benefit fund rules or amendments approved by APRA, issue member notice no later than the day on which notice is given of the next general meeting, and include the date the change came into force and the text or a summary (paragraphs 36, 38, 41 and 51).

Capital and borrowing controls

Monitor free assets: Maintain processes to calculate free assets for each fund in accordance with LPS 110 and LPS 112 so that unsecured borrowing remains below 50 per cent of free assets as required by paragraph 90. Integrate capital monitoring into treasury and ALM processes to avoid exceeding borrowing caps when capital metrics fluctuate.
Ensure LPS 110/LPS 112 compliance: Any surplus distribution, restructure, termination or repayment of seed capital must factor in compliance effects on Prudential Capital Requirement and capital base. Have the Appointed Actuary model the post‑action capital position and document the assumptions used.

Member and policy owner communications

Draft and file notices: Prepare member notices to meet the content and timing set out in paragraphs 51-52, 59, 68-70 and 83-84. Where APRA permits, notice may be given by advertisement in a generally circulating newspaper with APRA’s prior approval (paragraph 52). Retain proofs of service and copies of notices for APRA inspection.
Meeting management: For meetings to obtain special resolutions, ensure notice, quorum and procedural compliance with the Corporations Act and the society’s constitution. Provide the documents required by paragraph 59 and paragraph 79 and keep records of who received materials.

Recordkeeping and evidence trail

Reconciliation schedules: Implement and document procedures for weekly (or more frequent) reconciliations of joint investment accounts and single bank account controls (paragraphs 23 and 30). Maintain the joint investment register and control account reconciliations and retain them for APRA review.
Audited accounts and post‑event lodgement: After a restructure or termination lodge audited accounts or APRA‑approved accounts within three months, together with any other information APRA requires (paragraphs 72 and 87). Maintain supporting schedules for bonus history, unit conversions and distribution statements as required by paragraph 73 and paragraph 88.

Practical housekeeping

Authorised signatory list: Maintain an up‑to‑date list of officers authorised to sign Forms 1-6 on behalf of the principal executive officer and notify APRA in writing where required. Ensure forms are signed by the principal executive officer or an authorised officer as required by the forms.
Exemption and APRA engagement strategy: Where compliance cost or timing is a concern, proactively engage APRA to seek exemptions or agree on timing and disclosure approaches. Paragraphs 71 and 85 allow APRA to grant exemptions from notification requirements subject to conditions. Use pre‑lodgement engagement to reduce surprise information requests.
Budget and resourcing: Anticipate actuarial, audit and legal costs in planning restructures, terminations and major amendments. The Standard anticipates independent actuary reports, audited financial statements and comprehensive Appointed Actuary advice, so allocate resources and lead times accordingly.

By mapping each operational requirement in the Standard to a responsible owner inside the friendly society, maintaining a compliance calendar keyed to APRA timeframes and preserving an audit trail of actuarial advice, board resolutions, member notices and reconciliations, a friendly society can operationalise compliance with LPS 700.

Deep Dive

What it does

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