The Australian Prudential Regulation Authority (APRA) has highlighted the pressing need for improved valuation and liquidity risk governance within the superannuation industry.
The findings aim to guide trustees in aligning their practices with Prudential Standard SPS 530. This is done by focusing on independent external asset valuations and effective conflict management.
This move comes as superannuation entities, which manage approximately $2.7 trillion in assets, increasingly invest in unlisted assets like property and infrastructure.
APRA's review, which began in December 2023, examined the practices of 23 trustees overseeing about 80% of total assets managed by APRA-regulated entities.
This diverse group included trustees of various asset sizes and business models, offering a comprehensive look at the industry.
The review found that while there have been improvements since APRA's last unlisted asset review in 2021, many trustees still show significant gaps in key areas. This indicates a need for further enhancements.
Specifically, 12 of the 23 reviewed trustees needed substantial improvements in valuation governance and liquidity risk management to meet SPS 530 standards.
The review pinpointed weaknesses in areas such as board oversight, conflict of interest management, valuation control, and fair value reporting.
Liquidity risk management issues were noted in liquidity stress triggers, unlisted asset liquidity risks, and liquidity action plans. This underscores the importance of strengthening these frameworks.
APRA Deputy Chair Margaret Cole emphasised superannuation fund members rely on trustees to invest their savings wisely and ensure strong risk management practices.
Cole said: “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."
She noted that trustees must have reliable and timely information on asset values for sound investment decisions. They also need effective processes for managing liquidity risks.
“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. APRA expects trustees to review these findings carefully and formulate appropriate remediation plans where needed. APRA will 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,” Cole said.
The findings of APRA's review are seen as a call to action for trustees to enhance their practices.
APRA's findings serve as a critical reminder of the ongoing work needed within the industry. Trustees identified as having deficiencies will need timely remediation plans.
APRA expects all trustees to assess themselves against the prudential standard and enhance their valuation governance and liquidity risk frameworks as necessary.
The regulatory body has pledged to take further action within its remit to enforce these requirements.
This review underscores APRA's commitment to improving the superannuation system, which ranks among the world's largest.
By eliminating underperforming funds and scrutinising trustee expenses, APRA aims to enhance asset valuation practices. This ensures that members' retirement savings are protected and grown prudently.
The full review is available on APRA’s website for further details.