APRA’s review of super funds’ unlisted asset valuation and liquidity management practices has raised further questions about the skills and capabilities needed by trustees to effectively oversee these increasingly sophisticated and complex financial institutions.
The APRA review focused on board and management oversight of valuation and liquidity management and, even though the review was started about a year ago, it goes to many of the same issues canvassed in an independent report that raised concerns about how the skills and expertise of trustees are assessed when being appointed to the board of Cbus Super.
The Cbus report, conducted by Deloitte as part of enforcement action taken by the prudential regulator against the fund over concerns about its board governance, focused on Cbus specifically but it raised issues relevant to all APRA-regulated funds and the calibre of trustees appointed to oversee them.
APRA’s report, Governance of Unlisted Asset Valuation and Liquidity Risk Management in Superannuation, identified eight superannuation funds as being in need of urgent attention to unlisted asset valuation and liquidity management practices.
The unnamed funds received “requires improvement” assessments from the regulator in a review it commenced in December last year, examining data from 23 registerable superannuation entity (RSE) licensees which collectively account for about 80 per cent of all assets managed by APRA-regulated super funds.
A “requires improvement” rating means that in APRA’s view, a fund has “not demonstrated alignment” to Prudential Standard SPS530, Investment Governance in Superannuation, and “needs to make material improvements to its practices to address identified weaknesses”.
In a statement, APRA deputy chair Margaret Cole said the 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”.
“APRA expects trustees to review these findings carefully and formulate appropriate remediation plans where needed,” Cole said.
She said the regulator would “not hesitate to take further action where necessary to enforce the provisions of SPS 530 and related regulations, including the responsibilities of relevant accountable persons under the upcoming Financial Accountability Regime”.
APRA said it had “observed cases of material weaknesses in board oversight of valuations and in the management of potential conflicts of interest” during its review. Only 11 of the 23 funds reviewed had a dedicated valuation board committee, with others using what APRA described as “alternative groups”, such as investment or audit committees, to oversee valuations. The regulator said this raised “concerns that this may not be within the relevant governance body’s capability or capacity”.
“Overall, APRA observed the need for greater inclusion of independent committee members with specialist knowledge concerning individual unlisted asset classes,” its report said. Reading between the lines: funds need more people who know what they’re doing.
It also flagged conflicts of interest in the unlisted asset valuation space. Conflicts of interest are by no means a new issue in super funds, and were integral to APRA’s concerns about the governance of Cbus.
In the case of unlisted assets, “members of committees overseeing valuations included individuals whose remuneration may be dependent on the outcome of the valuation process in particular from asset management or investment management functions, something which could create a conflict of interest (real or perceived)”.
The Deloitte report into Cbus highlighted the fact that the directors appointed to the board of United Super, as trustee for the fund, were often left to assess their own skills in key areas. It found there was insufficient checking or confirmation of nominees’ self-claimed skills; and assessment practices were similarly lacking when directors were re-appointed.
But it also made the critical observation that over the past 30 years or so, superannuation funds have grown into large, sophisticated and complex financial institutions. Investment management has been insourced; funds are being asked to develop sophisticated advice and retirement income solutions; they have expanded into overseas offices; and – as supported by the APRA report – they’re investing in a wider range of asset classes, including almost half a billion dollars in unlisted assets.
All of these developments, and others, mean the demands on the individuals appointed to oversee super funds are also very different now than they were 30 years ago. The old way of appointing trustees may no longer pass muster.
It’s unlikely the issues identified by Deloitte exist in Cbus alone; and APRA’s review of unlisted asset valuations and liquidity management show clearly that governance issues exist across the APRA-regulated sector.
APRA singled out key issues related to unlisted assets, including weaknesses in board oversight and managing conflicts of interest; frequency of revaluations; revaluation frequency; triggers for revaluations; and reporting fair value of assets.
At also highlighted shortcomings around funds’ liquidity stress-testing, managing liquidity risks.
