The prudential regulator has issued a warning to super funds about offering cash options with underlying investments that are not ‘cash-like’ in nature.
In a letter to registrable superannuation entity licensees, APRA deputy chairman Helen Rowell said the prudential regulator had conducted a review that revealed instances where “‘cash’ investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature”.
According to APRA’s review, it had found that some underlying investments of some cash options included asset-backed and mortgage-backed securities, commercial bonds and hybrid debt instruments, credit-default swaps, loans and other credit instruments.
“These assets do not typically exhibit the characteristics necessary to be considered as cash or cash equivalent,” Ms Rowell said in the letter.
“There were also exposures noted to cash enhanced vehicles without sufficient policy guidance as to the permitted holdings of these vehicles.”
Ms Rowell reminded super funds of their obligations under SPS 530 Investment Governance which states that an RSE licensee must be satisfied it has “sufficient understanding and knowledge of the investment selected, including any factors that could have material impact on achieving investment objectives of the investment option… and the investment is appropriate for the investment option”.
APRA has followed up with a number of super funds identified in the review and will continue to monitor super funds’ cash investment options, Ms Rowell said.
She added that the prudential regulator expected RSE licensees to “consider the content of the letter” and reassess their ‘cash’ investment options that had exposure to non-cash assets where necessary.
The letter comes a month after Ms Rowell appeared before the Economics Legislation Committee where she said “some cash options seem to be returning much higher than we would expect from what you might call a pure cash option and there are others that are returning much less”.
“Our initial work seems to suggest that part of it goes to the types of instruments, if you like, which are in those. They are not just term deposits; they may be enhanced cash, RMBSs or other types of securities that are cash-like but not cash.
“And in other cases it does come down to the level of expenses that are being charged for the management of those cash options. Those are all issues that we are pursuing with the relevant funds where [we] have identified them as being outliers in that regard.”
She also admitted that the superannuation regulatory framework had “room to strengthen” with regards to placing tougher requirements on the ways super funds assessed member outcomes and what they were delivering, as well as the reporting and disclosure that would allow APRA to address these issues more quickly.
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