The Association of Superannuation Funds of Australia (ASFA) has questioned whether super funds should be forced to hold capital as a way of managing liquidity risk, and suggested actuaries might have a role to play in signing off on the valuation of unlisted assets.
Melinda Howes, director of policy and industry practice at ASFA, said super funds had limited ability to build up cash outside of their strategic asset allocation ranges and questioned whether they should be required to hold capital within the fund.
“The capital could be used not just for managing liquidity risk but for other purposes,” she said, such as significant event disclosures and additional marketing and communication.
Speaking at the Institute of Actuaries 2009 Biennial Convention in
Sydney yesterday, Howes admitted that holding capital would be expensive for super funds, and suggested insurance might play a part in the solution to managing liquidity risk.
She also proposed a new role for actuaries in signing off super funds’ liquidity risk management plans, and also the methodology used for valuing unlisted assets. These documents are currently only signed off by an auditor.
Howes said she believed that the financial crisis would have a positive impact on the way super funds manage liquidity in future.
“Super funds will come out stronger, better equipped for the future, with a better understanding of the risks and more formalised ways of managing liquidity,” she said.
“Funds will run deeper scenario testing… they might have different contingency plans in place for ‘what happens if’.”
Earlier this year, the Australian Prudential Regulatory Authority (APRA) began asking superannuation funds for plans detailing how they would cope with a confronting range of scenarios – including total liquidation.
Last week, the prudential regulator sent a letter to trustees clarifying its expectations of trustees in relation to the valuation of unlisted assets held by their super fund.
In the letter, APRA said one of the most critical aspects for the trustee to implement and monitor is the governance of the process.
“The key components include a robust, well documented policy framework which is approved by the board and communicated to all parties responsible for its application,” APRA said. “The policies should be reviewed by the trustee on a regular basis. In addition, it is considered good practice to have in place a nominated body dedicated to the oversight of the valuation process. This could take the form of a valuation committee, or similar group within the trustee’s governance structure.”