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The disclosure of investment risks in superannuation options will soon be standardised under a new industry guideline to provide consumers with greater transparency.
The Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) have created a Standard Risk Measure to enable consumers to better understand the investment risk in the option they have chosen.
Investment options are to be labelled with one of seven risk bands, ranging from ‘very low’ to ‘very high’.
The bands are based on the estimated frequency of negative returns for the strategy over a 20 year period, with ‘very low’ expected to have less than 0.5 negative returns, while ‘very high’ would have six or more.
ASFA chief executive Pauline Vamos said the measure would help trustees approach risk disclosure on a consistent basis and assist fund managers to better understand trustees’ requirements.
“The release of this guidance paper is a key part of the increased transparency in ‘true to label’ reporting that consumers will see from the current superannuation reform process,” Vamos said.
“Trustees of Australian Prudential Regulation Authority (APRA) regulated funds already have strong governance processes around the risk levels of their portfolios, but as the Standard Risk Measure will be monitored by regulators, even greater assurance can be provided to fund members,” she added.
FSC chief executive John Brogden said the Standard Risk Measure would help consumers to make better informed, confident decisions about their superannuation.
“Having a clear understanding of risk is just as important as being aware of fees or returns,” Brogden said.
He added that the new measure will enable consumers to “compare apples with apples” when looking at different investment options.
The methodology for determining an investment option’s rating will be supported by a structured review process, with both APRA and the Australian Securities and Investments Commission (ASIC) reviewing the operation as part of their normal activities.
From June 2012, APRA will require superannuation funds to identify and disclose, on a standardised basis, the risk of negative returns over a 20-year period for each of their investment options.
The measure came about in response to a request from APRA that the FSC and ASFA work together to develop guidance for super fund trustees on complying with risk disclosure.
