The superannuation operational risk financial resources (ORFR) requirements will change on 1 July 2025. This will tilt the scales in favour of larger funds of over $30b and even more for those funds over $175b. The trustee (for ORFR held in a reserve) or shareholder(s) (for ORFR held as trustee capital) should consider the best strategic use of excess funds that can be released from the ORFR.
This alert covers the new Prudential Standard SPS 114 Operational Risk Financial Requirement and a corresponding new Prudential Practice Guide SPG 114 Operational Risk Financial Requirement, which will both commence on 1 July 2025.
Key takeaways
- Some new content requirements for ORFR strategies
- Larger super funds may be able to reduce their ORFR financial resources
- Trustees will be able to use their ORFR financial resources for a wider range of activities, including preventing an identified operational risk event and correcting the cause of an operational risk event
- An express requirement for a surplus to be material before any ORFR can be reduced
- Reduction in ORFR notification requirements to APRA.
What you should do now
In the lead up to the commencement of the SPS 114 (2025), trustees should:
- ensure that they fully understand the changes to operational risk financial requirements
- consider whether compliance with these changes should be included as part of their CPS 230 compliance projects in light of the links between the two Prudential Standards
- undertake a gap analysis of their ORFR strategies and ORFR procedures
- for trustees with funds under management of $30 billion or more, determine the target amount of their ORFR having regard to their operational risk profile and risk assessments together with the other factors listed in SPS 114 (2025)
- update their ORFR strategies, policies and procedures, and
- seek legal advice to ensure full compliance with the changes and to address any complex legal implications arising from the new standards.
KWM can assist with navigating this new regulatory terrain and the implications of these changes for your existing operations and strategies.
Introduction
Following from APRA Prudential Standard CPS 230, APRA has now finalised its updated requirements for operational risk financial resources. Both CPS 230 and SPS 114 (2025) will commence at the same time.
The trustee duty in section 52(8)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) remains unchanged and continues to require trustees to manage financial resources (as trustee capital and / or a reserve) to cover operational risk in accordance with SPS 114. However, APRA has revamped a number of key areas of SPS 114, including by integrating SPS 114 (2025) with CPS 230 given both Prudential Standards impact, and are impacted by, operational risks.
What has not changed?
The key elements of SPS 114 (2025) remain the same as SPS 114 (2013), including:
- maintaining operational risk financial resources (as trustee capital and / or a reserve) in accordance with an ORFR strategy which sets out an ORFR target amount and a tolerance limit; and
- managing shortfalls in accordance with a replenishment plan.
Meaning of operational risk has changed
Operational risk is no longer defined in SPS 114 (2025). Instead, you are directed to CPS 230 for the definition. CPS 230 does not itself contain a definition of operational risk but instead:
- refers to operational risks as being risks that result from inadequate or failed internal processes or systems, the actions or inactions of people, or external drivers and events;
- notes that operational risk is inherent in all products, activities, processes and systems; and
- states that operational risks include, but are not limited to, legal risk, regulatory risk, compliance risk, conduct risk, technology risk, data risk and change management risk.
As the meaning of operational risk is core to the new requirements, trustees will need to carefully consider what definition they apply from 1 July 2025. We recommend that they set out the applicable definition in their ORFR strategy.
Further, the concept of an operational risk event has been removed from SPS 114 (2025), which reflects the expanded scope for applying ORFR resources to operational risk events that have not materialised.
Type of ORFR resources
While ORFR resources can continue to be held as trustee capital or in a reserve, the obligation has changed from resources which can be applied to address losses in a timely manner to resources which are “readily available”.
SPG 114 (2025) continues to use the “timely manner” wording, but expressly refers to being timely in situations involving entity stress.
This suggests that there is no need for a substantial change to the investment strategy for an ORFR, provided the assets can always be accessed in a timely manner regardless of the circumstances of the super fund.
Amount of ORFR resources
SPS 114 (2013) requires trustees to have ORFR resources for both known and unknown operational risk events. In practice, most trustees adopted an ORFR target amount of 0.25 bp, consistent with APRA expectations.
While the rules for determining the amount of ORFR resources have changed little in SPS 114 (2025), there has been a significant shift in APRA expectations. SPG 114 (2025) states that only trustees with total funds under management below $30 billion are expected to have a target amount of 0.25 bps. Larger super funds can reduce their target amount as follows:
- funds under management of between $30 billion and $165 billion, 0.20 bps; and
- funds under management greater than $165 billion, 0.175 bps.
APRA continues to expect trustees who invest in a PST or life company to have a target amount of 0.10 bps.
This means that trustees with funds under management of at least $30 billion could have a surplus in their ORFR on 1 July 2025. If that surplus is material, a trustee can consider distributing the surplus to shareholders (if ORFR resources are held as trustee capital) or for the benefit of members (e.g., to their accounts or another reserve in the fund, if ORFR resources are held in a reserve).
Use of ORFR financial resources
The use of ORFR resources is currently limited to making a payment to address an operational risk event (or for certain other limited purposes). SPG 114 (2013) states that ORFR can be applied to meet losses sustained by or gains deprived from an operational risk event but not to correct the cause of the event.
From 1 July 2025, a trustee will be able to use their ORFR for the following:
- to address operational risks that cause or could cause loss to members;
- to meet the requirements of CPS 230 for the effective management and prevention of operational risk incidents; and
- to reduce a material surplus.
SPS 114 (2025) has shifted to a more preventative focus, allowing RSE licensees to use ORFR resources to enact preventative measures, rather than only addressing materialised losses.
However, SPG 114 (2025) states that ORFR should not be used for BAU costs such as the development, maintenance and enhancement of the operational risk management framework or investing in new systems, processes and technology that is not in response to (or to prevent) an operational risk event or material weakness. While not clear, it appears that ORFR can be used to prevent identified operational risk issues but not generally for operational risk management purposes.
SPG 114 (2025) also confirms APRA’s longstanding position that ORFR should not be used to pay insurance premiums or financial penalties.
Change to ORFR strategies
ORFR strategies were always required to set out the process for determining when and how ORFR amounts could be called on.
This is another example where the wording in SPS 114 (2025) has changed little, but APRA expectations have changed.
In SPG 114 (2025), APRA states that it expects ORFR strategies to document when they would use ORFR, including remediation, upgrades to systems and processes and executing BCPs, recovery plans, exit plans and orderly termination of service provider agreements in response to an operational risk event.
Notifying APRA
SPS 114 (2013) requires a trustee to notify APRA, within 10 business days, if:
- it determines the ORFR target amount must be changed;
- ORFR has fallen below the tolerance limit;
- it becomes aware of an emerging operational risk event(s) that would require the use of a material amount of the ORFR;
- it becomes aware that an operational risk event has occurred that may require the use of a material amount of the ORFR; or
- any other trustee-determined material trigger event has occurred that may require the use of the ORFR.
SPG 114 (2013) also outlines that APRA would expect a trustee to notify APRA early if the trustee were to reduce their surplus.
SPS 114 (2025) removes most of these notification events. The only notification event will be to notify APRA of a material change to the target amount prior to the change occurring. Further, SPG 114 (2025) contains no reference to early notification of a reduction in surplus.
This suggests that APRA will have significantly less involvement in the management and operation of ORFRs from 1 July 2025.
Review and audit
The review and audit obligations in SPS 114 (2025) have not changed. However, there is additional commentary in SPG 114 (2025).
SPG 114 (2013) refers to trustees adopting material trigger events that act as a risk management control by providing early warning and a means of escalation for relevant matters.
This material trigger event regime has been expanded upon in SPG 114 (2025), where APRA states an expectation for trustees to set up proactive triggers and reporting systems to alert their board about any issues that may need preventive action related to the ORFR. This could involve matters concerning the funding, management, investment, and use of ORFR, as well as whether the target amount is appropriate.
SPG 114 (2025) also states that trustees should maintain comprehensive records of how they use or might use ORFR. This includes records of decisions not to use the ORFR. APRA notes that keeping such records, along with details of significant operational risk events and near misses, will assist a trustee to develop, review and monitor its ORFR strategy by providing a clear overview of its decisions regarding the use of ORFR financial resources over time.
