Some heightened expectations and clarifications from APRA on valuation processes 5 min read
After two years of consultation on investment governance practices in superannuation, APRA has recently released the final Prudential Practice Guide (Investment Governance) (SPG 530).
The final SPG 530 largely mirrors the draft guidance (as released in late 2022), but with some heightened expectations on managing valuation processes and clarifying the regulator's expectations regarding stress testing and approach to environmental, social and governance (ESG) risks in investment governance.
In this Insight, we reflect on the key changes arising in the final SPG 530. For a refresher of the broader changes proposed in the draft SPG 530, see our earlier Insight from December 2022.
Key takeaways for superannuation trustees and investment teams
Quarterly valuations (and then some)
Carried forward from draft SPG 530, APRA retained its expectation that trustees should undertake valuations on at least a quarterly basis. This is consistent with the approach that most funds across the industry had already adopted. Where this does not occur, APRA expects trustees to demonstrate why the chosen valuation frequency is appropriate, having regard to matters such as the frequency of permitted member transactions, how valuation data is incorporated in unit prices or crediting rates (as applicable) and access to valuation information and costs.
An expectation to seek valuation forecasts from external managers
To ensure valuation updates are implemented as close to quarter-end as possible, APRA has included a new expectation in the guidance that trustees should ensure that valuations are received in timeframes that support 'active oversight and timely implementation of valuation changes', and includes an example of a trustee seeking to ensure that valuations are received in line with, and ahead of, common performance measurement periods (such as quarter-end).
This change is important and places an increasing onus on trustees to engage with asset managers before quarter-end to seek preliminary or forecast valuation guidance, in advance of the conclusion of the manager's formal valuation process. That said, a balance needs to be achieved between timeliness and accuracy as it would be equally problematic to have a situation where inaccurate valuations reflected in unit prices need to be untangled (and unfair impacts on different member cohorts remediated).
Member equity risks
APRA has reinforced its focus on the role that trustees play in mitigating member equity risks and ensuring that the valuations process results in members transacting at fair prices across asset classes. The suggestion that trustees should jump to enforce blackout periods around asset valuation periods (to manage member equity risks) has been dialled back to one of a number of potential options for trustees to consider in managing this risk. We discuss the significant risks, issues and uncertainties of imposing blackout periods in our earlier Insight.
Direct versus externally managed assets
APRA also declined requests to include detailed guidance in relation to valuations of indirectly held assets and instead indicated its guidance is equally relevant to different holding vehicle arrangements (including pooled and externally managed assets). While a number of aspects of APRA's guidance on valuation methodology read as if it is more relevant to directly held assets, trustees should take care to ensure that each element of the guidance on valuation methodology in SPG 530 is appropriately applied (or if excluded, with justification) to externally managed assets.
Stress testing
APRA's final SPG 530 helpfully addresses queries as to how to reconcile the relationship between annual stress testing requirements and more frequent stress testing – although the answer is effectively the more, the better. That is, not only is it APRA's expectation that a RSE licensee's stress testing program determines the frequency with which stress testing is conducted, APRA also expects RSE licensees to demonstrate how the benefits arising from more frequent stress testing (ie beyond annual stress testing) have been considered. This includes whether there are benefits to undertaking more frequent stress testing, such as quarterly or 'in line with certain criteria pre-determined by an RSE licensee'. APRA also suggests there may be factors that require ad hoc or more frequent testing, which it expects trustees would consider.
ESG risks
While there are few substantive changes to APRA's guidance on ESG risks, there are various tweaks to ensure the focus is on ESG from a risk perspective and that consistent language is used.
That said, APRA has clarified that it expects RSE licensees to consider using their influence or investment market presence for the purpose of generating value in investments. As we know, a trustee must (and must only) take into account ESG risks in investment decisions where doing so is consistent with its broader obligations (including the duty to act in the best financial interests of members). APRA's clarification here arguably goes to show that the financial imperative underpinning trustees' duties remains at the forefront of its mind (including for time and effort spent on policy advocacy and other stewardship pursuits).
Next steps
SPS 530 commenced on 1 January 2023. APRA expected RSE licensees to comply with the revised SPS 530 prudential standard despite the practice guide being in draft. Now SPG 530 has been finalised, trustees should take the opportunity to review and confirm that their operationalisation of the investment governance and valuation reforms are in line with the final version of SPG 530, particularly in an environment of continued regulatory and media focus on the valuation of illiquid assets by superannuation trustees.