ASFA WA STATE CONFERENCE Charles Littrell Executive General Manager Australian Prudential Regulation Authority 7 May 2003 PRUDENTIAL SUPERVISION TRENDS

2 Ensure regulated entities meet their financial promises Depositors, Policyholders, Super Fund Members Competition, innovation, cost APRA’s Mission

3 DB members have a promise Accumulation members have an expectation All Funds: –Trustee works in member interest –Sound Risk Management –SIS compliance The APRA Mission in Super

4 PROBABILITY RATING IMPACT RATING LOWMEDIUMHIGHEXTREME Extreme High Medium Low Probability and Impact Rating System (PAIRS) 4

5 Supervisory Oversight and Response System (SOARS) RISK IMPACT

6 Subject to legislation Licensing, Risk Management Tiered Multi-year process Super Licensing

7 Demanding but not complicated Do you have a sound Risk Management strategy? Do you follow the strategy? Can you prove this to APRA? 3 x “Yes” = Simple Process Any “No” means more work is needed Is Super Licensing Hard?

8 Trustee Risk –Training and time –Conflicts of interest Investment Risk –ALM –Liquidity –Dollars on the table Outsourcing –Plan for adversity Key Risk Management Issues

9 Write it down! –Plans, procedures outcomes Regular Review –By Trustees –By third parties Tell your members –And the public? Can You Demonstrate Good Risk Management?

10 Statistical collections –Expand from June 2004 –Balance sheet, cash flow, costs –Will help APRA ID outliers Research –Fund performance –Cost composition –Public use of data Other Issues

11 An Example: Trustee Effectiveness APRA SCREEN: ADJUST FOR: RULES OF THUMB: FORMULA: Trustee ability to maximise member interest Asset allocation Return net – Return Benchmark = Indicator > - 1/.0: Good -1.0 to – 2.50: Ok -2.5 or Lower: Hmm…

12 1.APRA is becoming… –More data driven –More systematic –More interventionist 2.Don’t worry about licensing –Worry about Risk Management 3.Trustees are the key –Competent –Diligent –Motivated Summary

ASFA WA STATE CONFERENCE Charles Littrell Executive General Manager Australian Prudential Regulation Authority 7 May 2003 PRUDENTIAL SUPERVISION TRENDS