Following a two-year process of consultation and reform, APRA’s latest guidance aims to help super trustees with the formulation, implementation, and oversight of an investment strategy, including unlisted assets.
The updated guidance is designed to assist trustees in meeting their obligations under the strengthened Prudential Standard SPS 530 Investment Governance (SPS 530), which came into force on 1 January 2023.
This includes an RSE licensee’s approach to unlisted assets and associated valuation practices, which have received heightened scrutiny this year. Earlier this month, the prudential regulator was pulled up by the Financial Regulator Assessment Authority (FRAA) for falling short on its unlisted assets oversight.
A review found APRA’s supervision and resolution work in this area may have been “delayed and deprioritised”, with the potential to lead to unfair member outcomes for millions of Australians.
In its latest guidance, APRA said a “rigorous and active approach” to valuation governance ensures appropriate reflection of asset valuations.
Among other consideration, an RSE licensee’s valuation framework should ensure effective board and management ownership, oversight, robust policies, and processes; consistent valuation methodology (unless there is appropriate documentation to support a varied methodology); operational and structural independence between the persons responsible for investment decision making and those responsible for undertaking the valuation of investments; and adequate oversight by internal audit and external audit.
APRA said it expects performance and risk outcomes of investment options to be reported on at least a quarterly basis. It also recommends the implementation of a ‘blackout period’ around expected asset revaluation periods to ensure beneficiaries transact at fair prices across all investment options.
Additionally, it expects an RSE licensee considers increasing the level and frequency of reporting and valuation oversight during times of heightened market volatility.
Effective stress testing would consider a range of scenarios across systemic/market-wide risks (like liquidity or climate change), macro-economic (interest rate or oil price shocks), and targeted sector or stock events. A prudent licensee, APRA said, would also consider other factors like member generated (changes in switching behaviour, redemptions, and contributions) or policy-driven events.
On the issue of liquidity, the regulator expects an RSE licensee to consider the potential impacts on beneficiaries of secondary risks associated with liquidity risk, including the impact of selling assets at ‘stale’ prices, the impact on portfolio risk of an increasing proportion of illiquid assets, and the cost of restoring the portfolio to the desired position.
“By making these significant changes, APRA seeks to drive more robust governance of fund investments and ensure trustees put the best financial interests of their members at the centre of investment strategies and decisions,” said deputy chair, Margaret Cole.
“The reforms have been broadly welcomed by trustees, many of whom have sharpened their focus on the valuation of unlisted assets, liquidity management and stress testing in recent months.”
JP Morgan’s 2023 Future of Superannuation report, which collated data from six super 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.”
