1 November 2021
Robert Gottliebsen – Business Columnist
As industry and retail superannuation funds plan to increase their investment in unlisted securities, APRA and ASIC have disclosed dangerous gaps in the valuation processes of some of the funds and the willingness of some executives, trustees and their spouses to engage in a form of insider trading to take advantage of those bad valuation practices. It is the long term fund members who have been hit.
That means Treasurer Josh Frydenberg and Superannuation Minister Jane Hume must step in and look after members by forcing all funds to disclose their unlisted property and other unlisted assets; the valuation of each of these investments; the regularity of investment review: and in the case of income producing property the yield that is used to calculate the value. This is an absolute minimum. There is a good case to follow the US and demand details of all transactions. While most members will not read the disclosures, they will enable analysts and journalists to undertake the much needed task of monitoring fund valuations.
The existing legislation appears to already require the funds to disclose unlisted holdings and their values but the regulators have not enforced it. Clear regulation is urgently required and later changes need to be made to the legislation to stop the director/trustee rorts — albeit that a only small minority have abused their power and taken advantage of the doubt as to whether insider trading laws apply to superannuation funds when trustees, directors and their spouses switch their fund holdings to under valued unlisted assets.
For more than a year the ALP and some superannuation fund executives have been campaigning to prevent their members from being told the values of the properties they own and how those values were arrived at.
Among the superannuation executives who have been campaigning are people I respect and I am sure they had no knowledge of the dreadful practices that have now been revealed by APRA and ASIC.
The ALP appears to have been motivated by the cash it receives from unions.
Whether it be the superannuation fund executives or the ALP, the arguments they used to prevent disclosure were dubious at best.
In unlisted property trusts it is common not only for the individual property valuations to be revealed but also the yield which is used to calculate those property values. Naturally these values change especially in times when there are sharp fluctuations in interest rates as we have seen recently.
Superannuation funds every day are paying out pensions and lump sums to retiring people and at the same time taking in funds. It is totally unfair not to have up to date valuations on all unlisted assets — especially when there are major changes — because without them either the buyer or the seller is in danger of being disadvantaged.
Some of the arguments used to urge the government not to do the right thing by superannuation members by not disclosing valuations make no sense at all. For example it was even suggested that disclosure would impact the ability of a fund sell an asset. Buyers of a particular property will want to know the rental income and will make their own judgment on recent sales and yields in the sector. Book values of the non listed assets in a fund change regularly so the way the property is listed in the books is almost an irrelevancy in the sale process.
Meanwhile, the findings of APRA and ASIC are sickening given this is a $3 trillion industry where members trust their directors and trustees to undertake proper valuation processes and not to turn bad valuation methods to their own benefit.
APRA found few big superannuation funds had “robust, pre-existing frameworks for implementing, monitoring and reverting to regular valuation approaches following out-of-cycle revaluation adjustments” — ie they did not quickly adjust unlisted asset values when there was a major rise or fall.
Among the APRA discoveries were: the absence of formalised monitoring processes for valuation adjustments; no framework for the alteration of valuation adjustments; inconsistent valuations for different classes of unlisted assets; and board and management time dedicated to devising processes, rather than considering and challenging valuations
This is elementary stuff.
Then ASIC discovered how some trustees, directors and their spouses abuse the consequences of this bad management.
An ASIC surveillance about personal investment switching by directors and senior executives of superannuation trustees has identified “concerns with trustees management of conflicts of interest”.
ASIC looked at a sample of 23 trustees (including trustees of industry and retail funds) and focused on conduct during the time of increased market volatility arising from the Covid-19 pandemic.
They often found “clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter the risk”.
“This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members.
“The superannuation funds had failed to identify investment switching as a risk and there was a disparity in board level engagement, lack of restrictive measures and in adequate oversight of investment switching and lack of oversight of related parties”
Frydenberg and Hume have done a wonderful job cleaning up the superannuation industry to the benefit of members but there is more work to be done.