Minister, I beg you to stop this mischievous super rip off

Today I make a special plea to Assistant Treasurer Stephen Jones on behalf of all long-term investors in large, APRA-regulated superannuation funds.

The previous government left a significant hole in the protection of superannuation fund members which needs to be covered.

Back in December 2021 ASIC began scrutinising investments made by 67 super fund workers across 23 super funds.

They were looking to take fund executives to court for insider trading because they moved their personal retirement savings out of unlisted assets before the investments were dramatically reduced in value at the onset of the Covid-19 pandemic.

The key question was whether the super fund executives used their access to price-sensitive valuation information for personal gain by switching investment options based on knowledge of the timing of the revaluation of unlisted assets.

The question was whether the super funds’ executives exploited the loophole for their personal gain at the expense of their members.

And the word is now spreading that they were not prosecuted by APRA or ASIC so they were not breaking the law.

Given that this has happened at the top, even more people will join the game to the detriment of the majority of members.

Australia superannuation funds have some $650bn in unlisted securities, mostly in property and unlisted venture funds.

In the case of listed investments there is a daily market which makes valuations very accurate and therefore fair for both those who are adding to the their superannuation and those who for whatever reason are taking money out or switching.

But the rules on valuing unlisted investments did not require regular updates so where there was a sharp fluctuation in the value of a known unlisted investment, money was going in or out on the basis of old valuations which meant that unfair transactions were taking place either to the buyer or the seller.

Earlier this month, in a long overdue move, APRA instructed big superannuation funds to value their unlisted assets at least quarterly, and more frequently during periods of market volatility or big policy change by governments. In the past, funds ran valuations often half yearly and sometimes annually.

APRA also recommends the use of blackout periods around each revaluation period to prevent members moving into or out of unlisted investment options while they are being revalued.

The new regulation came after the Financial Regulator Assessment Authority (set up by former treasurer Josh Frydenberg, operated by former Macquarie chief executive Nicholas Moore, Gina Cass-Gottlieb and Craig Drummond) raised concerns.

But the reform task has not been completed.

The new regulation comes after the Josh Frydenberg-established Financial Regulator Assessment Authority, raised concerns. Picture: Andrew Henshaw

Today’s APRA-regulated funds have many investment alternatives including units in categories that are dominated by unlisted investments.

In the past those with knowledge of big valuation changes in the unlisted marketplace – such as the recent collapse in office building values or big falls or rises in the value of unlisted venture funds – can trade in out of those specialised units at values that are above or below market value to the detriment of other members of the fund.

And that’s exactly what has been going on.

The freezing of redemptions and subscriptions around valuation time will obviously help, but it does not go far enough.

The next logical step is for Mr Jones to change the superannuation law so that no longer do APRA regulated funds have to meet switch requests within three business days.

A move to quarterly, and with minimum three months notice should apply to all requests to switch within a fund, or to rollover to another fund.

This would help prevent opportunistic switching between different asset classes of a fund, or between funds to prevent the ‘disengaged’ members – the majority – from being taken advantage of by active traders.

There is no logical reason why an investment with a 30-50 year horizon offers three day switching.

I emphasise that this would not apply to people taking money out of a fund to meet retirement and other obligations.

It would not prevent redemptions in the usual shorter time horizon for the purpose of paying death benefits, or paying funds out of the super system in the retirement phase, or by those who are those seeking a lump sum release of funds.

Unlike switching, once money is withdrawn from the super system, it can’t be put back in easily and tax benefits are lost.

Those trading within the superannuation fund movement are undertaking entirely different transactions and retain their tax benefits.

Such rules would not apply to self managed funds because the mischief of opportunistic trading in/out of assets at unrealistic prices can’t happen in an SMSF – you can’t insider trade against yourself.