The Australian Securities and Investments Commission (ASIC) has advised trustees of defined benefit superannuation funds to make adequate disclosures to members, following poor returns caused by the global financial crisis (GFC).
This follows a review of the disclosure practiced following the GFC, when funds across the superannuation sector suffered poor investment returns.
The move is also in line with ASIC's focus to ensure trustees make appropriate disclosure to members and improve disclosure practices in relation to defined benefit funds.
"While investors in defined benefit funds are typically less affected by investment markets than those in accumulation funds, the GFC highlighted that prolonged market falls can impact a defined benefit fund if there is a funding shortfall and the employer is unwilling or unable to meet shortfall amounts," ASIC commissioner Greg Tanzer said.
He explained that many investors in defined benefit funds may not be aware that their ultimate benefit is affected by the capacity of their fund to meet the defined benefit.
"ASIC therefore encourages trustees to be vigilant about the financial position of their fund and to actively consider making disclosures to help members better understand the financial position of the fund. Trustees are best placed to explain market risk and what happens in the event of a funding shortfall," he said.
Mr Tanzer said ASIC would be paying particular attention to disclosures by defined benefit trustees in the future.
"A failure to provide existing members with ongoing disclosure, where disclosure is required, is an offence."
ASIC said it will consider issuing stop orders on product disclosure statements where it believes there is insufficient disclosure.
To determine the extent of the impact of the GFC on other defined benefit funds, and examine the disclosure practices of those funds, ASIC contacted defined benefit fund trustees about their funds' financial position and the disclosures they were making to members about their funds' financial situation, particularly where there is a funding shortfall.
ASIC paid particular attention to the funds' Vested Benefits Index (VBI), a measure of the financial position of a fund.
ASIC's review of approximately 470 defined benefit funds and sub-funds found that 58 per cent of funds had a VBI at 100 per cent or above, whilst 30 per cent reported a VBI between 90 and 100 per cent.
Only seven per cent reported a VBI between 80 and 90 per cent, and one per cent was less than 80 per cent.
The remaining four per cent of funds had either closed, had no more defined benefit members, or had not disclosed their VBI on the basis they are government funds.
ASIC was pleased to note that more than 70 per cent of trustees of funds with a funding shortfall disclosed the shortfall to members in the trustee's annual report.
