Trustees do not need to have the investment judgement of the consultants they employ, but they must be able to demonstrate an understanding of the advice they receive, a senior manager at the Australian Prudential and Regulation Authority (APRA) has said.

In a presentation to delegates at the Australian Institute of Superannuation Trustees’ Australian Superannuation Investment conference on the Gold Coast, Craig Roodt, senior manager of market risk, emphasised trustees equally are not expected to understand each stock in a portfolio, but they must be able to explain the strategy and risk behind a portfolio or mandate.

He explained that a driver behind Prudential Standard SPS 526 was to avoid the situation where, when asked to explain investment decisions, trustees simply said, “Our consultants advised us to do it”.

Roodt said trustees had to be involved in determining the strategy, understanding the risk, what is driving returns and the implementation. None of this could simply be delegated to the consultant.

He was particularly keen on trustees being able to understand the risk taken to generate returns. “We want the organisation to understand what it is exposed to,” he said. “We are not saying the board has to substitute its judgement for [that of] the fund managers. They just need to demonstrate they understand. We want a chain of evidence of how the decision was made.”

Reporting to APRA on how decisions were made, Roodt added, should not be carried out by those ultimately in charge of signing off on these decisions.

Other areas he expected trustees to understand were around how the fund would cope under various stress scenarios, particularly if there was a big drain on liquidity.

At the end of the session Roodt was asked questions from the floor. One trustee asked if APRA has a motivation in setting compliance so high that smaller funds were forced to merge with larger ones. He replied that one way smaller funds could comply would be to pay for greater amounts of external expertise.

He added that APRA’s program of regulation should be concluded by Christmas and that thereafter it would issue regulations based on particular action taken by super funds, part of which would be formed by feedback of data analysis.

At the end of the session, delegates were asked how compliance with the new investment-governance prudential standards and practice guides had impacted on their funds.

Most respondents (88 per cent) said it had enhanced their practices, while 13 per cent said it had been detrimental.

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