INSIGHT

Superannuation trustees get prepared, as first reporting date to disclose portfolio holdings approaches

By Geoff Sanders, Nicholas Allingham
Superannuation Financial Services

In brief 6 min read

After many years of deferrals, the first reporting date for superannuation funds to disclose their portfolio holdings is fast approaching, with trustees being required to disclose item-by-item investment holdings (as at 31 December 2019) by late March 2020. We take a closer look at the requirements of the revised disclosure obligations, and the work that superannuation trustees will need to undertake before the end of the year in order to comply.

Background

As those in the superannuation industry will be aware, the revised version of the obligations that require superannuation trustees to disclose portfolio holdings were introduced into the Corporations Act 2001 (Cth) as part of the 'Member Outcomes' legislation that came into effect in April this year.

Believe it or not, the original portfolio holdings provisions were first introduced all the way back in 2012, but never came into effect, due to a series of deferrals by ASIC in response to industry concerns. In particular, the provisions had caused serious (and justified) consternation in the superannuation industry, due to the complicated 'look through' nature of the requirements. These would have required superannuation trustees to disclose indirect investment holdings all the way down to the underlying asset level for each entity in which the superannuation fund is invested (including through third-party fund products).

This would have necessitated superannuation trustees undertaking a potentially onerous task of negotiating disclosure rights at the portfolio level for investment vehicles, generating concerns that superannuation investors would be refused entry to some alternative investments, such as private equity and hedge funds, where portfolio company and valuation information is typically considered by fund managers to be commercially sensitive.


What information must be disclosed under the new regime?

Under the revised regime, all superannuation entities (called 'reporting entities') are required to disclose publicly on their websites the following information about each investment option (ie on an investment-option-by-investment-option basis):

  • sufficient information to identify each investment item (called a 'disclosable item') allocated to the investment option that:
    • is held by the reporting entity, an associated entity of the reporting entity or a pooled superannuation trust; and
    • is neither an investment in an associated entity of the reporting entity, nor an investment in a pooled superannuation trust;
  • sufficient information to identify the value, and the weighting or exposure, of each disclosable item; and
  • the total value, and the weighting or exposure, of all disclosable items.

When must the information be disclosed?

The above information must be published on websites twice each year within 90 days of 30 June and 31 December (based on portfolio holdings as at the end of the day on each of those dates). As mentioned, the first reporting day is 31 December 2019. Accordingly, portfolio holdings as at that date will need to be disclosed by late March 2020.

Scope of disclosure: which investments are 'disclosable items'?

The revised requirements seek to strike an appropriate balance, by requiring disclosure of asset holdings of third-party investment vehicles only where the third party is an 'associated entity' of the superannuation fund. This means that:

  • investments held directly by superannuation funds (ie where there is no third party) should be disclosed (eg direct investments in listed securities, unlisted assets, derivatives etc); and
  • for indirect investments held through third-party entities, only the investment in the first 'non-associated' entity of the superannuation fund should be disclosed (and not subsequent entities in the holdings structure).

As such, a key question for superannuation trustees in looking at the investment structures will be whether the entities in which they hold interests are 'non-associated'.

While the tests under the Corporations Act are more involved that this, in most cases an entity will be an associate under the Act if the superannuation fund:

  • controls the entity; or
  • has significant influence over the entity in circumstances where the investment in the entity is material to the superannuation fund.

Control

'Control' is determined by reference to the capacity to determine the outcome of financial and operating policies of the investee entity, and can arise either from the existence of formal legal rights (eg the holding of a majority voting interest in an entity), or from any practice or pattern of behaviour that demonstrates practical influence over the investee entity's operating and financial policies. As an example, practical control might arise where the entity is accustomed to acting on the directions or instructions of the superannuation fund.

Materiality and significant influence

Materiality is not defined in the legislation, but needs to be considered in the context of the overall size of the superannuation fund. On that basis, it is possible an investment that would be material to a smaller fund may not be material to a larger fund.

'Significant influence', although not defined in the legislation, generally requires a degree of practical or legal influence over the entity that is less than control. A superannuation fund will have significant influence over the investee entity where it has the power to participate in the financial and operating policies of the entity in a legal or practical sense. There is a range of factors that would point towards significant influence (eg representation on boards and governing bodies; participation in policy-making processes, including regarding distributions; and any interchange of management personnel).

Exceptions to disclosure

Information about a disclosable item does not need to be disclosed if it relates to:

  • an investment option that has been closed to new members for at least five years;
  • an investment in an asset that is held solely to support a defined benefit interest; or
  • an investment in an asset that relates to certain kinds of life policy or investment account contracts.

In addition, superannuation funds can determine not to disclose up to 5% (by number of disclosable items) of investment items (other than derivatives) for each investment option (ie on an investment-option-by-investment-option basis) if:

  • those investment items are commercially sensitive; and
  • making information publicly available about those items would be detrimental to the interests of members.

The Corporations Act also states that disclosure will not apply to investment items of a kind prescribed by the Regulations, or to investment items that are not 'material', as prescribed by regulation. However, as at July 2019, no Regulations have yet been made (or proposed). That said, we expect that draft exposure Regulations may be released in the coming months, and they may address matters such as the manner in which information should be organised on superannuation funds' websites, and (with luck) a materiality threshold for the purposes of the materiality exception to disclosure.

The (somewhat arbitrary) 5% concession was introduced in an attempt to address industry concerns that public disclosure of investment holdings would foreclose certain investment opportunities for superannuation funds (particularly in the unlisted and alternative asset space).

How to prepare

Superannuation trustees should already have commenced reviewing their portfolios, to assess the scope of disclosure that will be required. This assessment is likely to require a detailed review of underlying investment documentation, to determine whether particular investment interests relate to an associated or non-associated entity of the superannuation fund (eg investments in externally managed pooled vehicles or wholly owned externally managed vehicles).

In addition, superannuation trustees will need to review the adequacy of their existing side letters and investment documentation with third-party fund managers, to ensure that:

  • external managers are required to provide the information needed to comply with the superannuation fund's portfolio holdings obligations; and
  • there are appropriate provisions in place to allow public disclosure of that information without breaching applicable confidentiality obligations.