Change Management Plans by TurksLegal

CLIENT UPDATE 8 March 2011

Change Management Plans Summary On 28 February 2011, APRA wrote to superannuation fund trustees about the need to have in place a Change Management Plan (CMP) whenever a significant change is being considered by the trustee or its service providers. We have analysed the key points about the contents of a CMP in APRA’s letter and have included below some of our own observations which trustees may wish to consider in meeting APRA’s requirements.

What is a Significant Change? The significant changes for which APRA requires a CMP are fund mergers, restructures, successor fund transfers, changes to trustee(s) and changes to service providers. While a trustee may take the view that a given change is not a significant change for CMP purposes, in our view, the trustee should ensure that all changes are supported by appropriate due diligence and are appropriately documented.

Why is a CMP Necessary? In its letter, APRA indicates that poorly managed change implementation can give rise to a number of risks for funds and their members and that from a wider industry perspective, a poorly managed implementation process may undermine member confidence. We would add to this that in discharging its duties to act prudently and in the best interests of the members, a trustee contemplating a significant change needs to plan that change so that the potential risks attending the change are appropriately managed. Documenting the management of risks in a CMP is, in our view, a necessary part of the overall change implementation.

Further, APRA has indicated that it expects a copy of the due diligence undertaken and the handover arrangements to be detailed in any application or relief request. For example, all applications for relief under reg 6.37 of the SIS Regulations must outline the exceptional circumstances and present a business case that would warrant APRA granting relief for rollovers and transfers. Preparing a CMP will assist trustees in relief applications to APRA.

Contents of the CMP APRA expects the CMP: • to detail the steps being undertaken to implement the significant change; • to outline the rationale underlying the assumptions adopted; • to justify the proposed timelines for implementation; • to allow sufficient time for a proper due diligence assessment to be completed;

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• to ensure that adequate human, financial and IT resources are available to manage both the change and the ongoing day-today activities at both the trustee office level and for material outsourcing service providers; • to consider the governance implications of the change including consideration of conflicts of interest. In its letter, APRA does not specify what governance implications or conflicts of interests might arise, but in our view they would include potential conflicts that may arise in senior management as well as at the trustee Board level, and would be of particular importance where, in the case of a successor fund transfer, the transferring and receiving trustees are related parties, or the same party; • to include a review of the Risk Management Plan (RMP) to identify and monitor the impact of the significant change and monitor the efficacy of compensating controls. Attention should be given to updating the RMP and risk management framework and ensuring the adequacy of human, IT and financial resources; • for successor fund transfers, to include as a task, an equivalent rights assessment as required under the successor fund provisions of the SIS legislation, ensuring it is conducted at arm’s length, that the trustee is acting in the best interests of members and referring to APRA Superannuation Circular I.C.4 Equivalent Rights for Members in Successor Fund Transfers and APRA Superannuation Circular II.A.6 Winding-up a Superannuation Fund. Where the successor fund transfer is between two superannuation funds with the same trustee, that trustee applies to APRA for a modification declaration to facilitate the required equivalent rights signoff; • to include ensuring that a complying material outsourcing agreement is in place before the change of service provider takes effect. Also consideration needs to be given as to whether portability relief is required for any interim blackout period exceeding 30 days (e.g. where the trustee is unable to fully facilitate transfers/rollovers during transition); and • to identify any legal issues that may need to be addressed prior to the change taking place, allowing sufficient time to adequately resolve these matters, particularly where interaction with APRA is required.

Preparing the CMP In our view, one way of approaching the preparation of a CMP is to break it down into 3 main components: 1. a Business Plan which clearly identifies the proposed significant change and handover arrangements; 2. a Risk Analysis which analyses the risks in making the significant change and the measures to be taken to manage those risks; and 3. the Due Diligence to be undertaken. 1.

Business Plan

In our view, the CMP needs to contain a Business Plan which: • clearly identifies the proposed significant change and the members and parties affected; • identifies the various steps to be carried out to effect the significant change;

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• for each step, identifies:

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the parties involved in carrying out that step and the relevant contacts;

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the potential risks and the measures taken to manage those risks;

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who has the responsibility for ensuring that the step is completed;

• sets out the business case underlying the significant change having regard for the trustee’s obligations to act prudently and in the best interests of the members; • contains a timeline specifying out the date by which each step is to be completed with flexibility built into the timeline as appropriate; and • sets out the various assumptions that the trustee has made in preparing the business case and setting the timeline for the significant change and the tasks to be accomplished. 2.

Identifying and managing the risks

We also think that the trustee should consider the possible risks that attend each step in the CMP. The risks will be particular to the change under consideration. For example, where assets are to be transferred to another fund under a significant change: • one of the key risks is likely to be out-of-market risk. In our view, the trustee should ensure that it has identified the steps it will take to minimise this risk; and • some transition managers may seek to limit their liability for any out-of-market risk. The trustee should ensure that the fund does not inappropriately bear this risk (e.g. where the transition manager is in breach of the service standards under the Transition Management Agreement (TMA) but seeks to limit its liability in that regard). In other situations, there may be a ‘gap risk’. For example, where the insurance arrangements are to be transitioned to a new insurer, there is a risk that a member might not be insured for events occurring between the changeover of insurers. The trustee needs to consider what steps are required to address that risk. In our view, where possible, the timeline should allow sufficient time for each task to be completed properly and build in a degree of flexibility so that unpredicted and unavoidable events do not derail the project. This is particularly the case where the trustee proposes to run several critical path tasks in sequence (e.g. system builds and legal advice). The trustee should consider which tasks need to run sequentially and which can be run in parallel (i.e. at the same time). 3.

Due diligence

In our view, one approach to ensuring that an adequate due diligence process is carried out and documented under the CMP is to consider the tasks required under the different responsible areas, including, as relevant: • Administration – including assessing the administration system requirements and ensuring that the administration system has the capacity to deliver the significant change;

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• Marketing/Member Communications – including preparing significant event notices, drafting other member communications, drafting communications to employers and dealing with member queries/complaints; • Accounting/Finance/Tax – including advising in relation to taxation and stamp duty impacts of the change and effect on capital requirements; • Investments – including investment transition management; liaising with transition managers, investment managers and custodians; • IT/Systems – including whether the IT system has capacity to deliver the change and identifying what systems builds are necessary; • Product/Strategy – including consideration of pricing issues, product features, efficiencies and liaising with service providers (e.g. insurers); • Distribution – including liaising with financial planners and employers in relation to product changes; and • Legal, Risk and Compliance – including advice and monitoring on the various legal aspects of the significant change, having regard for the relevant regulatory guidance (e.g. APRA Superannuation Circular I.C.4 Equivalent Rights for Members in Successor Fund Transfers and APRA Superannuation Circular II.A.6 Winding-up a Superannuation Fund), including as relevant:

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the trustees’ power to make the significant change under the governing rules of the fund(s);

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whether the significant change is prudent and in the best interests of the members;

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whether the significant change is at arms’ length and otherwise consistent with the SIS Act including satisfaction of any relevant legislative tests (e.g. reg 6.29 of the SIS Regulations);

negotiation and preparation of documents including, as relevant:

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a transition management agreement;

service provider agreements and service standards;

- insurance policies;

- preparation of relevant legal documents (including deeds of transfer, deeds of adher- ence); and

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materials to members and employers communicating the changes;

liaising with APRA, including any relief applications for:

portability relief where required for any interim blackout period exceeding 30 days e.g. where the trustee is unable to fully facilitate transfers or rollovers during transition;

portability relief for frozen or suspended investments;

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family law splitting relief;

- defined benefit fund/subfund transfer requirements where there are less than 50 members; and

other relevant exemptions under Part 9 of the SIS Regulations;

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signing off on member and employer communications and significant event notices;

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advice in relation to any governance implications (including conflict of interest issues);

• review of the RMP and the risk management framework (ensuring the adequacy of human, IT and financial resources);

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review and advising in relation to the compliance of any new material outsourcing agreements;

• impact of any conditions on the trustee’s RSE licence (e.g. capital requirements, particularly where a custodian is involved; specific conditions that may apply which require a licence variation by application to APRA);

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impact of any conditions on the trustee’s AFS licence;

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the wind-up of the fund(s);

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preparation of a legal opinion to the trustee Board addressing the various legal aspects; and

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assisting the project manager in preparing the relevant Board papers to enable the trustee Board to resolve to make the significant change.

Please note, this is not intended to be an exhaustive list and trustees will need to consider the contents of their CMPs on a case-bycase basis. Paul Cleary has expertise in advising trustees and their service providers in relation to significant changes and would be pleased to provide advice on any aspect of change management.

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For more information, please contact: Paul Cleary Partner

T: 02 8257 5760 M: 0407 052 170 paul.cleary@turkslegal.com.au

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