APRA told to focus on unlisted super investments

ANALYSIS

The Australian Prudential Regulation Authority (APRA) was sent a clear message in last week’s release of the Financial Regulator Assessment Authority (FRAA) review of its activities – it has to do better in monitoring superannuation fund investment in unlisted assets.

While first impressions of the FRAA review was that it was largely benign with respect to APRA, it actually listed unlisted investment issues at the top of things it believed the regulator should do.

The review also raised the little-discussed by thorny issue of the consolidation occurring among the major superannuation fund administrators as they face into superannuation fund mergers and acquisitions.

Noting that “APRA’s focus on emerging and industry-specific risks relevant to superannuation, is not yet as well-developed compared with its more mature regulation of the banking and insurance industries”, the FAAA said the regulator should be directing greater attention to six issues topped by unlisted assets.

• conversion of unlisted or illiquid assets to cash
• unlisted asset valuation practices
• more members moving to the retirement phase
• increasingly complex investment strategies undertaken by trustees (who are increasingly sourcing investment strategies in-house), and the development of complex income-stream products
• severe market downturn, exacerbation by financial instability and member switching requests
• failure or industry exit of administration service providers.

Interestingly, the major remaining superannuation administration providers Link and Mercer have had to contend with the loss of mandates as funds merge and are forced to make decisions about who they want to continue with.

The insourcing of investment management will also present APRA with a challenge in circumstances where funds have both in-house capacity but are continuing to use external asset consultants.