APRA falls short on unlisted assets oversight

APRA’s supervision and resolution work in unlisted assets and associated valuation practices may have been “delayed and deprioritised”, with the potential to lead to unfair member outcomes for millions of Australians, according to a new review.

A review by the Financial Regulator Assessment Authority (FRAA) has found APRA’s response to trustee valuations of unlisted assets, which include assets like airports and toll roads, private equity, and office buildings, emerged “in response to ongoing media coverage of the issue rather than APRA’s proactive identification”.

“APRA’s focus on emerging risks and industry-specific characteristics relevant to superannuation is not yet as well developed as its more mature regulation of banking and insurance,” the review stated.

“The FRAA is concerned that APRA has at times been reactive and has focused on a limited number of key risks facing the sector, which may have significant implications for how trustees are delivering outcomes for members and the broader financial system.”

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Inadequate oversight of unlisted assets and associated valuation practices could have serious consequences on members’ fund balances, it observed. 

“If members decide to switch asset allocations or withdraw funds, and assets have not been appropriately valued, the amount withdrawn may not reflect the asset’s true value,” it explained.

“Remaining fund members may then be left with an unfairly reduced or inflated balance and new members may overpay as they enter the fund. 

“If unlisted assets are overvalued, older members in the decumulation phase are likely to benefit at the expense of younger members in the accumulation phase.”

Given the characteristics of the super industry, the FRAA urged APRA to direct greater attention to such risks, using the tools at their disposal to “understand the implications at a member, entity, industry, and financial system level,” the review added.

The FRAA assessment of APRA commenced in 2022 and was intended to take place on a biennial basis. However, following changes to the review cycle in the 2023–24 federal budget, the next review is likely to take place in 2027. 

Earlier this year, APRA raised the bar for investment governance with the amendment of Prudential Standard SPS 530, which aims to increase trustee attention on valuation governance, greater use of holistic stress testing results as an input into the investment process, and more focus on liquidity management and stress testing processes. 

It intends to require up to 20 trustees to conduct a self-assessment of their compliance with the strengthened SPS 530 at the end of 2023, focusing on new requirements such as over-reliance on external parties and inadequate revaluation frameworks. 

The strengthened prudential standards come even as private assets grow in popularity in super fund portfolios.

Already, Australia’s largest super fund, $300 billion fund AustralianSuper, has about one-quarter of its balanced portfolio invested in private assets and plans to increase that allocation.

Similarly, $160 billion fund Aware Super plans to set up its first offshore office by the end of 2023, which will focus on private markets.

JP Morgan’s 2023 Future of Superannuation report, which collated data from six superannuation fund leaders in Australia and the UK, said unlisted assets have been a “significant driver” of super funds’ long-term outperformance.

It added: “While funds also see opportunities in listed vehicles – and remain mindful of illiquidity and valuation issues – their appetite for private market assets continues to grow.”