The Australian Prudential Regulation Authority (APRA) has written to superannuation funds to update them on amendments to prudential governance, including changes to stress testing and liquidity management.
The enhancements to SPS 530 Investment Governance would help ensure registrable superannuation entities (RSEs) met their obligations prudently to select, manage and monitor investments.
In a response to submissions on possible revisions, APRA executive director, Renee Roberts, said respondents had requested guidance that better reflected current investment practices, less prescription and guidance on environmental, social and governance (ESG) risks.
Regarding ESG, APRA said it intended to issue draft guidance on how an RSE licensee could clearly demonstrate ESG risks, reflect ESG considerations in their investment strategy and manage material ESG risks.
Regarding stress testing, APRA said there was a “significant need to improve practices” to ensure stress testing processes were improved, formalised and incorporated into investment decisions. This need had been heightened by periods of recent volatility in investment markets.
“APRA encourages RSE licensees to undertake a stress testing programme at least annually, with reporting to the board or relevant sub-committee clearly demonstrating the outcomes of the stress testing, the assumptions and modelling used, and where tolerances are breached, the potential actions that may be taken.”
The amendments proposed by APRA were:
- Consistent use of terminology to ‘develop, implement and maintain’ frameworks, policies and processes, where relevant. The addition of ‘maintain’ emphasises the iterative and dynamic approach that APRA requires RSE licensees to adopt in their approach to investment governance;
- Clarification that stress-testing programmes and valuation governance are to be regarded as components of the overall investment governance framework;
- Clarification that regular reporting to the board for each investment option and MySuper product does not necessarily have to include detailed reporting on individual investments. Instead, the board must approve appropriate measures to monitor performance, including the benchmarking methodology, and ensure that investments that are failing to meet benchmarks, adversely affecting the performance of an investment option, are reported to it; and
- Clarification that the valuation governance framework requirements do not require the establishment of a stand-alone board valuation sub-committee.