Table of contents
Frequently asked questions
Operational Risk Financial Requirement
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Current31 August 2015
Operational Risk Financial Requirement
If an RSE licensee decides to pass the cost of establishing a reserve for the purposes of the ORFR to members, would this constitute a fee? If so, how is this applied to MySuper members? Must it be charged as an administration fee?
If the RSE licensee decides to fund the ORFR through charges to member accounts, then APRA would expect this to be reflected in administration fees.
What are APRA’s expectations in relation to the ORFR for RSE licensees of unfunded defined benefit (DB) funds?
Prudential Standard SPS 114 Operational Risk Financial Requirements (SPS 114) applies to all RSE licensees for the purpose of paragraph 52(8)(b) of the SIS Act. SPS 114 requires each RSE licensee to determine and maintain an appropriate ORFR target amount of financial resources that reflects the operational risks of the RSE licensee’s business operations. APRA recognises that in some circumstances, an RSE that has unfunded DB liabilities may have entered into a government funding arrangement that limits the RSE’s direct exposure to operational risks relating to those DB liabilities. The funding arrangement may be a relevant consideration for the RSE licensee, which may result in a lower ORFR target amount than for other types of DB funds.
Can an RSE licensee manage an operational risk reserve, for the purpose of meeting the ORFR target amount, as a general ledger balancing item? (added 17 September 2014)
No, it is not acceptable for an RSE licensee to maintain an operational risk reserve as a general ledger balancing item.
A general ledger balancing item would be expected to fluctuate between time-periods and this would not meet the requirements of paragraph 17 of Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114).
Paragraph 17 of SPS 114 states that an RSE licensee may only use the financial resources held to meet the ORFR target amount to make a payment to address an operational risk event or to enable it to meet the requirements in paragraphs 19 (h) and (i) of SPS 114. These requirements deal with changes in the size of the ORFR target amount in the event of changes in the size, business mix and complexity of an RSE or the wind-up of an RSE.
Furthermore, paragraphs 18 and 19 (e) of SPS 114 require an RSE licensee to have an ORFR strategy, approved by the board, which must describe (among other things) the investment strategy for maintaining the reserves held to meet the ORFR target amount. Maintaining an operational risk reserve as a general ledger balancing item would not be consistent with this requirement.