The Australian Prudential Regulation Authority’s (APRA) latest review has uncovered major gaps in how superannuation trustees are managing the risks tied to unlisted assets, with 12 out of 23 trustees failing to meet key regulatory standards.
With assets held by APRA-regulated funds totalling some $2.7 trillion as at 30 June, the regulator noted that around $500 billion of this is invested in unlisted assets such as property, infrastructure, credit and equity.
“As the proportion of unlisted assets continues to increase, addressing risks related to valuation governance and liquidity risk management is a critical issue for the industry and a priority for APRA,” it said in a statement this week.
The prudential regulator’s latest review, which commenced in December 2023, examined the practices of 23 in-scope trustees, representing around 80 per cent of total assets managed by APRA-regulated entities.
The review found that while trustee capability and approach have generally improved since its last unlisted asset review in 2021, “a significant proportion of trustees still displayed material gaps in key areas”.
Namely, over half of the reviewed trustees were found to require “material improvements” in either or both their valuation governance or liquidity risk management frameworks to meet the requirements of the recently strengthened Prudential Standard SPS 530 Investment Governance.
Weaknesses were highlighted in board oversight, conflict management and liquidity planning, critical areas for protecting members’ savings. Other areas of concern flagged by APRA include valuation control, fair value reporting and liquidity stress trigger frameworks.
“These findings are concerning and highlight the need to further lift practices across the industry,” the regulator said.
It noted that it will engage directly with trustees found to have deficiencies, requiring them to develop timely remediation plans, and expects all trustees to review the findings, align with prudential standards, and strengthen their valuation and liquidity risk frameworks, with further regulatory action to be taken if necessary.
Commenting on the review’s findings, APRA deputy chair Margaret Cole said superannuation fund members rely on trustees to invest their retirement savings prudently and to protect and grow their money using strong risk management practices.
“Our superannuation system ranks among the largest globally and its performance has been improved by APRA’s efforts to eliminate underperforming funds, scrutinise trustees’ expenses and enhance asset valuation practices,” the chair said.
“These latest review findings are concerning and indicative of the fact that many trustees have more work to do to lift their valuation and liquidity risk management practices.”
The regular also cautioned that it would “not hesitate” to take further action where necessary to enforce the provisions of SPS 530 and related regulations.
Last month, Reserve Bank governor Michele Bullock told senators that while super funds are not inherently as leveraged as banks, their significant role in financial markets raises concerns, particularly in times of market volatility.
This warning aligned with a recent International Monetary Fund (IMF) report, which highlighted that more than 20 per cent of Australian super funds’ assets are tied up in illiquid investments. The IMF cautioned that this liquidity mismatch could undermine member outcomes during times of stress, particularly in market downturns.
Bullock’s comments were supported by the RBA’s own stability report, which found that the superannuation sector now accounts for a quarter of Australia’s financial assets.
Its rapid growth, rising ties to banks, and increasing footprint in financial markets have created new risks, including the potential to amplify financial shocks, the RBA’s stability report highlighted in September.
Drawing parallels to the near-collapse of pension funds in the UK in 2022, Bullock elaborated last month that large-scale asset sales to meet margin calls could exacerbate market ructions at home.
“If there are ructions in financial markets and we saw a little bit of this in the UK, it’s a different system there, but if super funds have to, for example, sell some assets to meet margin requirements than that can exasperate the ructions in the market and that might be a financial stability risk,” Bullock said at Senate budget estimates.
“The UK is a good example where what happened was there were problems in the financial market, in the bond markets, there were margin calls on [pension] funds because they had investments, and then they had to sell assets to meet those margin calls. That exacerbated the problems in the financial market.
“The fact that the assets and the liabilities of the super funds in Australia are reasonably stable, their long-lived, and their matched, is actually positive for stability. It’s just because it’s such as big part of the financial system now, it’s worth watching.”
