Super funds accused of misrepresenting investment options

By Lucy Dean

June 29 2018
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Misrepresentations of super funds’ cash holdings could be misleading savers, the prudential regulator has said, calling for funds to “review and restructure” their investment options.

In a letter to registrable superannuation entity (RSE) licensees on Friday, Helen Rowell, deputy chairman of the Australian Prudential Regulation Authority (APRA) said the regulator has found examples of funds purporting to include cash investment options which actually have exposures to underlying investments that generally would not be considered cash.

“Assets that APRA has observed forming part of cash options’ underlying investments include asset-backed and mortgage-backed securities, commercial bonds and hybrid debt instruments, credit-default swaps, loans and other credit instruments,” she said.

“These assets do not typically exhibit the characteristics necessary to be considered as cash or cash equivalent.”

According to the Association of Superannuation Funds of Australia (ASFA), cash investments account for 11.0 per cent of the super sectors’ investments as of March, and under super governance rules, members should be able to consider cash as available for withdrawal or transfer without changing any value, Ms Rowell said.

Additionally, ‘cash’ should represent cash on hand, deposits or cash equivalents.

As per APRA’s definition; “Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.”

Ms Rowell said the regulator will continue to monitor funds’ cash investment options and will follow-up with specific RSEs identified.

Funds will also need to review and restructure ‘cash’ investment options with exposure to non-cash assets.

Ms Rowell sounded the alarm about the misrepresentations of cash in super funds with the Senate economics legislation committee earlier this month, agreeing with the committee that there is concern over the low returns made by “various cash options”.

She said the regulator was working to assess the composition of cash options across the sector.

“The work we have done so far highlights a couple of different issues. One is that some cash options seem to be returning much higher than we would expect from what you might call a pure cash option and there are others that are returning much less.

“Our initial work seems to suggest that part of it goes to the types of instruments, if you like, which are in those. They are not just term deposits; they may be enhanced cash, RMBSs or other types of securities that are cash-like but not cash.

“And in other cases it does come down to the level of expenses that are being charged for the management of those cash options. Those are all issues that we are pursuing with the relevant funds where we have identified them as being outliers in that regard.”

She said the regulator’s current focus on member outcomes is adequate and that the scrutiny was about “pushing trustees to think a lot harder” about their investment decisions.

“There is room to strengthen the regulatory framework both in terms of putting tougher requirements on funds in terms of how they look at and assess member outcomes and what they are delivering at a fund, product and investment option level but also in terms of the reporting and disclosure and the information that is available that enables us and other stakeholders to get more visibility of these types of issues more quickly.”

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