The prudential regulator has proposed that superannuation funds complete a stress testing program annually after finding it, along with valuation and liquidity management practices, needed improvement.
The Australian Prudential Regulation Authority (APRA) released its revised standard on investment governance practices for consultation that identified enhancement opportunities.
It said some registrable superannuation entity (RSE) licensees lacked formal stress testing processes, and in some cases, results were not incorporated into the investment decision making process.
APRA proposed that an RSE licensee’s comprehensive stress testing program must be completed at least annually, and include at a minimum:
- Detail on the roles and responsibilities of persons involved in the design, implementation, review, reporting and oversight of stress testing;
- Articulation of the methodology, objectives, assumptions used and frequency of stress testing, as well as the review of the metrics and methodology employed;
- Identification of circumstances that may lead to the need for ad hoc stress testing, including triggers; and
- Processes to ensure the data used in stress testing is reliable.
APRA also proposed additional requirements to enhance RSE licensee valuation governance practices including:
- An RSE licensee must establish a valuation governance framework to identify and manage valuation risk, with a board approved valuation policy;
- An RSE licensee’s valuation policy must:
- Outline the roles and responsibilities of the board and other persons (where relevant) for the oversight and management of valuation processes and procedures;
- Outline the circumstances under which valuations of an RSE licensee’s investments were accepted, rejected or reassessed; and
- Identify the circumstances and triggers under which an interim valuation was to be undertaken outside of the regular frequency of valuations determined by the RSE licensee.
- An RSE licensee must, when determining the frequency of valuations, have regard to factors which may affect the ongoing appropriateness of a valuation, including market volatility, change in material investment return drivers and member equity considerations.
On liquidity management plans, APRA proposed it must:
- Identify personnel responsible for the management and oversight of liquidity risk;
- Include liquidity stress testing as part of their comprehensive stress testing program; and
- Outline key metrics to be reported to and periodically reviewed by the board, relevant board committees and senior management.