APRA needs risk-based approach to super data

A risk-based approach when it comes to accurately comparing funds needs to be developed by the Australian Prudential Regulation Authority (APRA), AMP believes.

AMP Australian wealth management chief executive, Alex Wade, said it welcomed the regulator’s moves to overhaul the way superannuation data was collected and reported but stressed clarity and simplicity of investment risk needed to be focused on.

Wade said while all funds were required to publish investment risk of each APRA fund, it was unlikely to be understood by members. Greater understanding and effectiveness for making comparisons was needed, he said.

“Particularly given the measure itself is based on the probability of loss, rather than the size of loss, and is not used by managers as genuine indicator of risk,” he said.

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“Beyond this, many funds appear ranked based on returns and fees alone – and while both incredibly important measures – comprehensive comparisons will require APRA to take risk into account.”

“…As an industry we must all start working together to find and agree to the right methodology that makes it easier for Australians to accurately compare their super products. We’re not there yet.”

Wade noted that many members relied on fund labels such as “balanced” to inform their judgement without realising that the underlying risk in the funds could differ greatly.

“People need to be able to understand what risk their fund is taking. The greater the transparency, the better placed consumers are to make an informed decision,” he said.

“One thing for certain is that markets rise and fall, and you don’t want to get caught at the tail end of a downward cycle.”

An AMP spokesperson told Money Management that AMP recognised that comparing superannuation funds across the industry is difficult, and "we’re working with APRA to help develop a system that makes it easier for Australians to compare funds on a like-for-like basis, taking into account risk".

"Improving financial literacy is also a major focus of AMP’s new strategy and we’re investing in new developing new digital platforms to make it easier for Australians to engage with and better understand their finances, including superannuation, risk and investment," the spokesperson said.

"From an investment perspective we look at several measures of risk and risk adjust returns to understand the drivers in our portfolios, the scenarios that can eventuate in a market environment, and how that will impact both near-term losses on portfolios, and the longer term implications for retirement outcomes."

APRA plans to move to a simpler and more consumer-friendly traffic light system to give super funds a rating of green, amber, or red based on returns, insurance, fees, and fund sustainability.

“A fund that is rated “green” will be considered an endorsement, so the methodology must be appropriate for the members’ needs,” Wade said.

He noted there were no standard guidelines either for classification of growth and defensive assets in super, making it difficult for consumers to make “apples with apples” comparisons.

Wade also pointed to the fact that a number of super funds were investing in unlisted property and infrastructure and had labelled them as defensive investments.

“But there is no doubt they lack transparency, and in the event of a downturn they may carry considerable risk,” he said.

“APRA needs to come up with a system to accurately compare funds – risk should be firmly on the table and reflected in the comparisons.”