The Australian Prudential Regulation Authority (APRA) has released good practice guidance for trustees on the labelling of investment options offered by superannuation funds.
“Objective criteria are necessary to allow superannuation fund members to understand and compare the key characteristics of investment options,” APRA deputy chairman Ross Jones said.
“At present there are no standard risk descriptors and there has been no industry-wide standard asset allocation for different labels, such as ‘balanced’, ‘conservative’, or ‘growth’.”
APRA’s view on appropriate descriptors of risk for investment offerings, developed in consultation with ASIC and industry associations, was a first step in developing and achieving industry standards for disclosure and data collection purposes, Jones said.
“APRA considers it would be good practice for trustees to adopt a suitable classification process that would ensure that members can more readily distinguish the characteristics of each investment strategy offered by the trustee,” he said.
“This can be assisted by trustees ensuring that, for each strategy offered, it is clearly stated what the expected frequency of negative returns of that strategy is over a 20-year period.”
In determining the expected frequency of negative returns, Jones said trustees need to be able to demonstrate that they have a proper basis for the conclusion reached.
“APRA would expect trustees to have access to robust data, systems and processes which substantiate the decisions to categorise investment strategies in this fashion,” he said.
“It is not enough for trustees to make an assertion – there is a need to justify the classification decision, for example through use of appropriate modelling. Professional assistance might well be required.
“APRA is not, currently, suggesting guidance on the risk level appropriate for labels such as ‘conservative’, ‘balanced’, ‘growth’ et cetera. This is something we would expect the industry to develop good practice material around over time.”
APRA was not currently proposing to require reporting against such classifications, Jones said.
“Rather, in the course of normal supervision, APRA would be looking at the trustee’s processes that lead to the determination of the risk categorisation of particular investment strategies.”
