With further draft guidance due to be released over the coming months, superannuation funds will need to be agile as the implementation date of 1 January 2023 approaches.
APRA recently released the final version of the new Prudential Standard SPS 530 (Investment Governance) (SPS 530), which will commence on 1 January 2023. You may recall that an exposure draft of the revised SPS 530 was released for consultation in November 2021. Both the final version of SPS 530 and APRA's formal response to submissions are available at APRA's website here.
The release of the final version of SPS 530 is timely given increasing regulatory focus on superannuation fund valuations of unlisted assets (in particular, venture capital investments). With further draft guidance due to be released over the coming months, superannuation funds will need to be agile as the implementation date of 1 January 2023 approaches.
The changes arising from APRA's exposure draft were summarised in our earlier Insight. APRA has only made minor / technical changes to that exposure draft as a result of the consultation process. The only real changes of any note are:
- some additional language to ensure that, when an RSE licensee determines the appropriate measures for monitoring investment performance, those measures must include a methodology for setting performance benchmarks (as well as the performance benchmarks themselves). Those measures (other than individual investment-level performance benchmarks) must be approved at board level. That said, it remains the case that appropriate performance benchmarks (and a methodology for setting them ) must be determined for each MySuper product, each investment option and each investment within an investment option – a potentially sizeable exercise given some funds have thousands of individual investment line items;
- a clarification that the performance of each individual investment does not need to be reported to the board and senior management (which would have been the case under the exposure draft); and
- some clarificatory changes to emphasise the importance of ongoing implementation and maintenance of investment governance policies and procedures.
A markup against the existing instrument is available on APRA's website here.
In practice, this means that the changes that will come into effect on and from 1 January 2023 are largely the same as those foreshadowed in our earlier Insight, namely that RSE licensees will need to:
- update their board-approved liquidity management plans to address the more prescriptive requirements set out in the new SPS 530 (particularly in relation to liquidity stress testing; the roles and responsibilities of the board, board committees and management; and reporting to the board);
- adopt and implement a valuation governance framework, including a board-approved valuation policy that addresses the various matters specified in the new SPS 530; and
- ensure their stress-testing program is approved by the board and addresses all the prescribed requirements set out in the new SPS 530.
So, RSE licensees will still need to do some work to be ready for 1 January 2023 – but in most cases, this is likely to involve an evolution of their existing policies and procedures, rather than the creation of entirely new frameworks.
The final version of SPS 530 is unlikely to satisfy those who were hoping to see a clearer indication from APRA as to its view on the public policy issues surrounding unlisted asset valuations. It also doesn't shed much light on the extent to which RSE licensees should conduct stress testing on a range of novel scenarios (eg, the introduction of something akin to an early release scheme in future), or the way in which trustees of smaller funds should approach the cost / benefit trade-offs involved in developing comprehensive valuation and stress-testing programs.
However, APRA has reiterated that additional guidance on these topics (and others) will be forthcoming in the fourth quarter of 2022, in the form of a new SPG 530 (Investment Governance) and SPG 531 (Valuation). In particular, APRA has indicated that the new guidance will address:
- ESG: While APRA has made it clear that each RSE licensee must ultimately make its own assessment of investment risk (including the weighting given to different kinds of investment risk and the manner in which those risks should be managed), it seems that APRA will provide further commentary on the manner in which prudent RSE licensees can demonstrate their understanding and management of ESG risks. APRA has now expressly stated that the boards of RSE licensees should be able to demonstrate their ongoing oversight of climate risk, as well as other ESG financial risks.
- Valuations: APRA considers that 'considerable improvement' is required in the industry's approach to valuations, and has stated that its forthcoming guidance will address matters such as valuation governance (including the use of independent experts and segregation of valuers from investment decision-makers); valuation methodology; the frequency and monitoring of valuations (noting that APRA now expects valuations to be conducted at least quarterly in most instances); and a comprehensive list of the kinds of valuation risk that RSE licensees should be considering. It is hoped that APRA sets clear expectations on the use and reliance on independent sources of valuations, recognising that there is a balance to be struck in weighing up the cost, reliability, availability and materiality of independent valuation sources to test, as may the case for many funds, a universe of thousands of private market investments.
- Stress-testing: APRA does not propose to develop a list of specific scenarios for which RSE licensees must conduct stress testing (which was requested in some of the submissions in response to the exposure draft). Instead, it seems that APRA will expect RSE licensees to 'choose their own adventure' in designing a range of scenarios for consideration – including, among other things, 'severe but plausible cash outflows', and consideration of the consequences 'at the most granular possible/practical level'. On its face, that would seem to be a very onerous requirement, particularly given that APRA will expect the testing to occur at least annually. In the absence of anything further from APRA, it seems difficult to see how RSE licensees should find a sensible balance between the extraordinarily broad universe of scenarios which are 'plausible' or 'possible', and the costs of conducting formal stress-testing on all of them (noting that those costs will ultimately be borne by members).