Large super funds are at the forefront of setting standards for the governance of unlisted asset valuations, according to the Australian Prudential Regulation Authority (APRA).
APRA’s latest review has uncovered major gaps in how superannuation trustees are managing the risks tied to unlisted assets, with 12 out of 23 trustees failing to meet key regulatory standards.
With assets held by APRA-regulated funds totalling some $2.7 trillion as at 30 June, the regulator said that around $500 billion of this is invested in unlisted assets such as property, infrastructure, credit, and equity.
Looking at funds’ valuation governance risk ratings, the regulator identified three registrable superannuation entities (RSE) as being rated green – or “favourable” – for their valuation governance frameworks.
“These were large funds that represented 31 per cent of in-scope FUM and 5.7 million member accounts,” APRA said.
Meanwhile, 12 RSEs were rated amber or “acceptable”. This included two platforms, two mid-sized funds and eight large funds, representing 48 per cent of in-scope FUM and 8.6 million member accounts.
Notably, eight entities were flagged as requiring improvement for their frameworks. This constituted two platforms, four mid-sized funds, and two large funds and represented just over a fifth of in-scope FUM and 4.4 million member accounts.
“The most common issues across those rated red or amber related to the management of conflicts of interest arising from investment staff being involved in the valuation process and lack of demonstrated challenge to valuations,” APRA said.
The regulator further said that whether an RSE licensee held assets directly – either internally managed or via an externally managed mandate – or indirectly – usually via holdings in externally managed unitised pooled vehicles – had a “significant bearing” on the practices observed in the review.
“In general, valuation governance for externally managed assets was shown to be less robust than for internally managed assets,” it said.
One key observation that APRA made was around opportunities for improvement in adopting a quarterly valuation cycle. Here, the prudential regulator pointed to large funds generally being more proactive in this area.
“A key example of better practice observed in larger RSE licensees was carrying out more frequent independent valuations of asset classes with a higher valuation risk,” it said.
Namely, two large funds had valuation-related committee meetings ad hoc, while four held them quarterly and seven held them more frequently than that.
Meanwhile, five mid-sized funds held quarterly meetings, but only one held them more frequently than once a quarter.
Commenting on the review’s findings, APRA deputy chair, Margaret Cole, this week said superannuation fund members rely on trustees to invest their retirement savings prudently and to protect and grow their money using strong risk management practices.
“Our superannuation system ranks among the largest globally and its performance has been improved by APRA’s efforts to eliminate underperforming funds, scrutinise trustees’ expenses and enhance asset valuation practices,” the chair said.
“These latest review findings are concerning and indicative of the fact that many trustees have more work to do to lift their valuation and liquidity risk management practices.”
