Australian pension funds, known as superannuation funds, now have stopgap guidance on how they should identify investment risks, perform valuations and stress test investment funds. However, most of that guidance, in the form of the Australian Prudential Regulation Authority (APRA) SPS 530 Prudential Standard, leaves the parameters for these measurements up to the funds to figure out.
APRA SPS 530 takes effect
SPS 530 took effect January 1, 2023. It’s an update to APRA’s SPG 530 investment governance issued in 2013. In July, APRA announced that it was drafting SPG 531 that it expected to issue for consultation later in 2022, although that new version has not yet appeared.
In APRA’s July letter about its plans, it acknowledged that submissions from RSE licensees, the government-approved superannuation funds, asked for more guidance on environmental, social and corporate governance (ESG) issues. They noted that SPG 530 limited consideration of ESG factors. In the letter, APRA maintained that funds have to determine what investment risk factors they will consider, how it will assess those risks, how much it will weight those risks and what controls it will set to manage that risk. Yet APRA did state that it will issue more guidance on ESG considerations as part of investment risk standards.
On valuation, funds’ submissions agreed with being required to have “an adequate valuation governance framework,” but asked for more guidance on when independent valuations are appropriate, what sources should be used and how results should be reported, as well as clarification of valuation frequencies. APRA promised answers to these questions in the upcoming SPG 531 guidance.
Funds’ submissions for guidance
On investment stress testing, funds’ submissions asked APRA for several types of more detailed guidance about how such tests should be done or what they should include:
- Providing example scenarios
- Framing of outcomes
- Connection to performance test results
- Consideration of fund, sub-fund and product levels
- How independent experts may be used to develop test scenarios
- Expectations for entities with less resources
For now, all Australia’s pension funds can do is wait for APRA to return from its walkabout with some regulatory clarity – but in the meantime, they might do well to design their ESG and climate scenario capabilities.