APRA’s new governance guidance aims to tackle super industry valuation concerns

Australia’s super watchdog has released new governance guidance for the $3 trillion industry in an attempt to address concerns over funds’ approach to valuing unlisted investments.

Australia’s super watchdog has released new governance guidance for the $3 trillion superannuation industry in an attempt to address concerns over funds’ approach to valuing unlisted investments, such as property, infrastructure and private equity.

The guidance follows recent criticism from the regulator’s supervisor that the Australian Prudential Regulatory Authority’s focus on emerging risks such as in how the sector values unlisted assets is “underdeveloped” relative to its handle of risks in the banking and insurance industries.

It also comes amid investor mistrust in how the pension funds – which invest 11 per cent of worker’s yearly incomes – value unlisted holdings in their investment portfolios, in an environment that has seen the value of assets fall as a result of rapidly rising interest rates.

The new guidance clarifies its expectation that asset valuations should be done “on at least a quarterly basis”.

APRA deputy chair Margaret Cole said the “significant changes” to the regulator’s expectations “seek 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”.

The reforms, which came into place in January, require funds to stress test their investment portfolios more often than once a year and to document an explanation if and why they aren’t doing so.

It also asks for more robust valuation frameworks, the incorporation of environmental, social and governance (ESG) risk factors and climate scenarios in their investment decision making, and a greater focus on liquidity management.

The regulator clarified that changes to the prudential standard on investment governance SPS 530 means it expects a fund to “ensure that all valuations are received within a time frame that supports active oversight and timely implementation of valuation changes”.

“APRA expects a registrable superannuation entity (RSEs) licensee would consider increasing the level and frequency of reporting and valuation oversight during times of heightened market volatility,” its new guidance, published on Thursday says.

If a fund chooses to value assets less often than every quarter, it must “demonstrate how it has determined that the valuation frequency is appropriate”, the guidance says.

“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,” Ms Cole said.

“In some cases trustees have already aligned their investment governance to the draft guidance released for consultation in November 2022.”

In its 98-page assessment of the regulator published last week, the Financial Regulator Assessment Authority said APRA needed to “direct greater attention to proactively identifying and comprehensively understanding risks, such as: conversion of unlisted or illiquid assets to cash (and) unlisted asset valuation practices”, among other areas.

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