APRA sends signal via HESTA on unlisted asset valuations

ANALYSIS

The net result may only be that affected members’ accounts will be adjusted by around $17 but the Australian Prudential Regulation Authority (APRA) handling of HESTA has sent a clear message to superannuation funds about valuations of unlisted assets.

Critics of the level of unlisted assets held by industry superannuation funds have often pointed to the validity of valuations during times of crisis and HESTA’s actions as the world and markets sought to deal with the COVID-19 pandemic represented a case in point.

What we now know is that on 20 March 2020, HESTA made downward adjustments to five single sector Choice options invested in unlisted assets but did not adjust other options with exposure to the same underlying unlisted assets (including HESTA’s MySuper option) until one week later.

In other words, HESTA treated some members differently to others.

APRA said it had decided to close its investigation into HESTA without further action because the superannuation fund had decided “to make payments to affected members to make them good” and had agreed to improvements in its valuation policies and procedures.

APRA said it was concerned that:

• HESTA’s decision-making processes for out-of-cycle revaluations of unlisted assets were not adequate for the deteriorating market conditions faced by superannuation trustees in March 2020; and

• HESTA’s valuation decision in March 2020 was unfair to members who switched from an adjusted single sector options to unadjusted options within that week and members who were issued units in the unadjusted options during the relevant week. In one instance, a member who switched investments from the adjusted Choice options to the unadjusted MySuper option during the week in question was approximately $17,000 worse off.

HESTA has not specifically said so, but it is open to the fund to make good its mistakes by drawing down on its contingency reserve – the same avenue via which other superannuation fund have sought to pay regulatory fines.

Interestingly, APRA’s action with respect to HESTA only began in January this year, nearly three years after the event, suggesting that the fund’s mistake was not detected by APRA but, rather, drawn to the regulator’s attention.

APRA said it commenced a formal investigation into the issue in January and subsequently “engaged extensively with HESTA” including supervision activities to oversee strengthening of HESTA’s policies and procedures around unlisted asset valuation decisions.

From HESTA’s point of view, a critical outcome has been that “there have been no findings of breaches or contraventions of the law”

A formal statement issued by the superannuation fund after APRA’s announcement sated:

“HESTA has been in discussions with APRA around adjustments to the number of units some members acquired in certain investment options during the period of significant market volatility, arising from the COVID-19 pandemic in March 2020.

“Upon further analysis, HESTA has determined that an adjustment to the number of units issued at the time be made for some members. There have been no findings of breaches or contraventions of the law. The median value of the adjustment will be around $17.

“This adjustment considers the difference in the value of units issued to these members at the time and investment earnings that would have subsequently accrued. Current members impacted by this adjustment will automatically receive the adjustment through their account and exited members will receive the equivalent dollar value of units via the ATO.

“This adjustment will occur in the coming weeks and current impacted members will be separately notified.”