Super funds struggling to comply with new rules on unlisted assets
Australian super funds are facing rising costs and other challenges, as regulators seek more frequent valuations for unlisted assets to comply with recent regulation.
New rules introduced at the start of the year, for which the latest guidance was published in July, stated expectations for super funds to value their unlisted assets every quarter.
Platon Chris, Australia superannuation advisory partner at KPMG, said super funds were indeed moving towards quarterly valuations, but flagged particular challenges around property and for those assets held abroad.
KPMG
“Property is the more problematic of the unlisted asset classes due to the idiosyncratic elements of the Australian market, including a reliance on historical transaction data which can be an issue if the market becomes less liquid,” he said.
“Obtaining more frequent valuations for international unlisted assets held by overseas managers may prove problematic for Australia funds compared to domestic assets.”
Chris also emphasised that complying with the regulatory guidance is imposing costs on super funds, which are likely to be passed on to members, a point echoed by Mary Power, head of the property research team and a principal consultant at superannuation consultant JANA, in Melbourne.
“The valuation process takes time and has a cost to unitholders. The frequency of valuations of stable assets in a stable market needs to be considered against this cost,” she said.
MEMBERS LOSE OUT
Widespread asset price declines at the start of the pandemic in early 2020 saw employer super contributions fall sharply in some industries. At the same time, the Australian government allowed early access to retirement savings in which inaccurate valuations may have caused many scheme members to lose out.
“The timing difference between quarterly unlisted valuations and a super fund members ability to switch investment options daily and withdraw funds as and when they are able to do so is the key driver for this concern,” said Chris.
A July review by the Financial Regulator Assessment Authority (FRAA), the independent statutory body that reports on the nation’s market regulator, the Australian Prudential Regulation Authority, or APRA, criticised its oversight of unlisted asset valuations.
“If members decide to switch asset allocations or withdraw funds, and assets have not been appropriately valued, the amount withdrawn may not reflect the asset's true value,” it noted.
But providing more frequent valuations when markets are stressed, is difficult, particularly when it comes to property and infrastructure assets.
JANA
“The challenge for effecting more frequent property valuations is procuring relevant market information, such as sales evidence which provides the basis for valuation metrics. In the current market, a dearth of sales evidence renders the revaluation process difficult with limited relevant transactions which valuers can analyse,” said JANA’s Power.
BEST PRACTICE
David Haynes, senior policy advisor at the Australian Institute of Superannuation Trustees (AIST), called on the regulator to guide funds to improve valuation methods in the face of what is now a more demanding, principles-based approach to valuations.
“[The regulator’s] approach is supported, though we think they should also be more active in highlighting what they believe is best practice,” he said.
Haynes added that frequency was secondary to the need for funds to ensure accuracy, especially at times of market stress: “The key to the most accurate valuations is not more frequent valuations (although that’s also happening), but having the right triggers for out-of-cycle valuations when there are adverse market conditions.”
And he emphasised the need to take a long view, despite the current adverse conditions and challenges following the pandemic.
“It should also be recognised that volatility is a normal part of market cycles, and funds have long-term investment strategies that accounts for this,” he said.
APRA’s guidance features details of high-level mechanisms that should be in place to facilitate better valuations. But it provides latitude for super funds to customise their approach.
According to Chris, how best to achieve greater accuracy depends on the type of asset, the size of the fund – both in terms of AUM and the number of members – and whether unlisted assets are managed internally or externally.
VARIATION
“In respect to directly held assets, a Super Fund’s manager due diligence process, valuation governance frameworks and internal capabilities are key to shifting to more frequent valuations. Super funds should look to leverage independent valuers where appropriate to ensure regular valuations,” he said.
AIST’s Haynes said few changes were needed to the status quo for internally managed assets, where independent valuations were common.
“Because industry funds have robust and long-standing processes around valuations, wholesale changes to valuation arrangements have not been necessary,” he said.
Many of the better externally managed infrastructure and property funds in which JANA clients are invested already re-value assets externally on a quarterly basis, with valuation policies detailing the frequency of valuations, selection of valuers and the rotation period across a panel of valuers, according to Power.
Chris pointed to the challenges of super funds changing behaviour via their managers.
“In instances where the super fund holds the asset/s externally through an investment manager or through a pooled vehicle it can be difficult for the super fund to influence managers to increase their valuation frequency due to their scale.”