How are super execs thinking through investment governance?

A series of roundtables hosted by Australia’s regulators have tested super funds’ preparedness to uplift governance when managing members’ money.

Particularly, funds identified the need for “prudent valuation practices and investment governance” as private markets continue to present appealing opportunities, as well as considerations in insourcing their investment functions.

The discussions, which took place in June and July, featured insights from a dozen superannuation chief executives, including AustralianSuper’s Paul Schroder, Australian Retirement Trust’s David Anderson, UniSuper’s Peter Chun, and Vanguard Super’s Daniel Shrimski.

According to notes provided by the regulators, the CEOs observed funds “have been on a journey to uplift investment governance and develop a mature industry with a risk focus”.

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“Regulatory reforms such as the Performance Test and mandatory ESG and climate reporting are viewed as tools that assist funds in integrating investment risk into their investment strategy and driving improved member outcomes through performance,” the notes stated.

Funds have also focused on uplifting controls through the “segregation of duties, enhancing delegations, and ensuring they have the right technical expertise and leadership skills” when it comes to risk management.

When it comes to internalisation, which has seen funds take a number of varying approaches, the CEOs agreed on the importance of a “robust risk culture” for funds looking to insource their investment functions.

This, the CEOs said, is crucial given an asset manager’s transition from profit-focused funds management to member-centric superannuation can be “culturally confronting”.

“Each fund must adopt an individualised approach to internalisation, which balances the key person risk, cost, and timeframes associated with establishing and maintaining internal investment functions against the members’ best interest,” the notes stated.

Opportunities to learn from investment managers in structuring and operating their business, such as implementing technical standards, were identified.

Looking at liquidity risk, which came to the fore following the COVID early release scheme, the CEOs said liquidity stress testing needs to be “more substantive”, with consideration for “extreme scenarios”.

Given some funds have historically used their MySuper portfolios to manage liquidity, discussions looked at the potential impact of that practice on MySuper returns and the need for “careful management of member equity”.

Looking at private market risks

During the roundtables, the super CEOs also voiced liquidity risk concerns when it comes to private markets, and with private market valuations.

“The CEOs stressed it is important for funds to understand the relationship between public and private assets, as well as how changes in valuations of one asset can have a significant impact on the overall balance of asset allocations and the funds liquidity levels,” the notes stated.

Private markets present attractive investment opportunities and it’s essential that funds have prudent valuation practices and investment governance in this space, according to the superannuation executives.

Both regulators have previously voiced concerns regarding private markets, with ASIC recently adding oversight of these markets to its expanded strategic priorities.

In its latest corporate plan for 2024–28, ASIC said reviewing the growth of private markets, which have traditionally been shrouded with opacity, will form a key part of its upcoming activities.

APRA has also described the interaction between private credit and super funds as “opaque”.

“The interactions between all these participants, including banks, non-banks, and super funds, however, is opaque. This is a central driver for APRA moving towards cross-industry stress testing, to better explore any potential contagion sources and gaps in the regulatory framework,” she said.

APRA plans to launch its first financial system stress test in 2025, Cole confirmed.

The regulator is also in the final stages of a deep dive review of asset valuation and liquidity management practices for a cross section of large and mid-size trustees with material exposure to unlisted assets.