There has been a change to the Superannuation Regulations (SISR 1994) in August this year, which places some additional requirements on trustees when formulating and giving effect to their investment strategies.
SISR 4.09(2)(e) has been added which requires consideration of "for a self managed superannuation fund - whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund."
Another amendment to the legislation requires “The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.” While this has been considered best practice by the ATO for quite some time, there was little they could do by way of enforcement. However, changes to the Regulations give them significantly more power to come after trustees who can’t demonstrate they are doing the right thing.
Apart from the added regulatory power, the changes don’t alter ‘best practice’. It simply requires trustees to do what makes sense – to help protect trustees/members from the risks involved with careless decisions. The thinking being that if you have to refer to, and consider, your investment strategy (that was perhaps formulated at a less heady time than when caught up in the cut and thrust of investment decisions), you will make more informed decisions.
It’s a good idea. However the fact that they are tightening the rules suggests it’s a good idea that hasn’t been followed terribly well. And while the requirement is now clear, it will be interesting to see how much effect it has on actual decision making (as opposed to compliance work by the administrator).
Other requirements of a good investment strategy are that the trustee can show (through minutes or other documentation) that they have considered:
- The risks and likely returns in relation to specific investments
- How these investments fit within fund’s objectives and cashflow requirements
- The need for diversification of the fund’s assets and the risk the fund is exposed to if there is lack of diversification
- The ability of the fund to meet current and prospective liabilities and cash flow requirements such as pensions, benefit payments, tax liabilities etc. :
- Compliance with other rules associated with investment such as in-house asset rules, collectibles etc.
Within the context of the investment strategy, the effect of SISR 4.09(2)(e) should not be under estimated. Where the protection of the fund’s liquidity and/or long term investment plan could have been achieved through insurance, and this insurance is not taken out, the trustees would need to be able to show why. Either the risks were judged to be non-material, other steps were taken which had a similar result, or that the costs of the insurance were unsustainable. However if the later were the case, the trustees may need to be able to show a very good reason why they proceeded with the investment.
Generally long term wealth creation involves taking on some level of risk. The degree of risk that is acceptable depends on the individual fund and/or member strategy. Of course where there is risk there is also possibly an adverse outcome. The outcome itself however, does not mean the strategy was defective, only that the risk came home to roost. The investment strategy (and the consideration of insurance within that strategy) should not be about the mitigation of all risk, but rather it should be evidence that the foreseeable risks were considered and a decision consciously made.