Outgoing APRA chair on rectifying super underperformance

Outgoing Australian Prudential Regulation Authority (APRA) chair, Wayne Byres, has shared his thoughts on superannuation fund consolidation and their increased weightings to unlisted assets ahead of his departure.

Byres had been chair since 2014 and announced in July that he would step down at the end of October. His successor was yet to be announced.

Superannuation was a key focus of his time with Byres saying “no other sector had seen so much change”. This included the Your Future, Your Super (YFYS) performance test and heatmaps.

Another focus had been the consolidation of funds with failure of the YFYS test leading to smaller funds to merge and APRA regularly stating it wanted to see more consolidation, prompting speculation the industry could end up with a few select mega-funds.

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Speaking to Super Review, Byres denied, however, that APRA had a target in mind to see a smaller number of mega-funds in the super industry.

“If you had a blank sheet of paper, you wouldn’t design super how it is now with this long tail of smaller super funds.

“It isn’t a case of ‘big is good, small is bad’ though, it isn’t that simple, there are some big funds that need to do better and some small funds that are delivering for members. But all the evidence does show that size helps.

“So if you are small and you don’t have the efficiencies, the strength or the competitive advantage then you have to ask yourselves if you can benefit members better than another trustee? And if you can’t then you have to ask whether it would be in members’ best interests to hand them over to someone else.

“It is not a case of APRA wanting to see 10 or 20 funds, it is about how can we rectify that tail of underperforming funds?”

Moving onto the increase in unlisted assets which were being held by super funds in light of the current market environment, Byres said it was crucial funds understood they couldn’t be managed in the same way as public assets.

Funds such as Hostplus, Australian Retirement Trust and HESTA had accumulated above-average weightings to unlisted assets such as infrastructure, property and private equity.

“It is problematic? No. But that is only so long as it has the appropriate governance, risk management and valuation practices are properly managed,” Byres said.

“If you are investing in liquid assets like listed equities and bonds then they are easy to price and are managed in a conventional way. When you become an owner of a private asset for the long term, you have to think much harder about liquidity and about valuation.

“The key mistake is to just think about them as conventional assets and to manage them in the same way without thinking about changing the valuation or the investment process.”