David Busoli, practice principal and SMSF specialist mentor with the SMSF Alliance, said the SMSF sector will be particularly interested regarding real property and infrastructure investments.
“SMSFs are subject to strict valuation requirements requiring market valuations on such assets to be both current and justifiable,” said Mr Busoli.
“APRA funds sometimes adopt a more sanguine approach to the valuation of such investments which has, on occasion, allowed them to publish rates of return which would not have been possible if they were held to the same valuation standards as the SMSF sector.”
Peter Burgess, CEO, director of policy & education for the SMSF Association said it is not clear how this prudential standard could be applied to SMSFs.
“In addition to requiring trustees to properly formulate an investment standard, which is already a standard applicable to SMSFs, Prudential Standard SPS 530 imposes certain governance requirements on trustees,” he said.
“Given SMSF members and trustees are one of the same, this standard would appear to have little relevance to SMSFs.”
The SPS 530 will require super fund trustees to maintain a level of vigilance in regard to stress tests, valuation and liquidity warned a senior product manager.
Daniel de Stefano, product manager and vice president of State Street, said the introduction this year of the revised investment governance standard SPS 530 requires that a registerable superannuation entity or super fund have a board-approved comprehensive stress testing program in place.
“This stress testing program is required to include modelling of different scenarios, and tracking the impact of the scenarios for members,” he said in a podcast for the Australian Institute of Superannuation Trustees.
Mr de Stefano said while the stress testing requirement applies across all investments, it’s likely to be more challenging for private markets investments given many super funds have historically had less transparency in relation to their private markets investments compared to their public markets investments.
“For instance, if a super fund invests in a portfolio of different private equity funds across different strategies in different geographies, it’s difficult to model valuation movements under different scenarios, unless you have a good understanding of the characteristics of the underlying investments,” he said.
“Similarly, modelling of fund liquidity under extreme adverse scenarios may lead to some challenging questions around the appropriate level of private market investment that these funds should hold.
“The result of the stress testing then needs to be notified to the board so an important aspect is ensuring that the board has clear responsibility for this process.”
Additionally, he said, the new standard seeks to bolster and elevate the importance of evaluation policy.
“Historically a super fund which invests in private equity funds, we’ve taken a fairly passive approach to the valuations received from the private equity manager, but SPS 530 really requires them to demonstrate that they’ve satisfied themselves in relation to the appropriateness of evaluations and considered any conflicts of interest that the manager may face,” he said.
Another key focus of SPS 530 he said was in regard to liquidity management.
“Similar to the valuation policy, it requires super funds to have a board-approved liquidity management plan and clear responsibility for oversight of liquidity management.”
“As with the valuation requirements, the new standard is not intended to be prescriptive in relation to how liquidity is managed, but rather it seeks to ensure that appropriate governance is in place so that the fund has a deep understanding of liquidity demands of the fund, and how investing in different asset classes may impact fund liquidity.”
He said it is a key area for funds as they increase the allocations to private markets, which are generally less liquid in public markets.
“The overall effect of the standard is not necessarily to prescribe how funds should manage these challenges, but rather to ensure that appropriate governance is in place, particularly to ensure policies and procedures are clearly documented,” he said.
“Australian super funds are somewhat unique globally. They seek to bring together the ability to invest in long-term illiquid assets, with the right for members to have a high level of portability between investment options and between different super funds.
“This leads to challenges and complexity. I think the requirements of SPS 530 an important step in ensuring that these risks are effectively managed by funds.”
