Strengthening investment governance for Australian superannuation funds

In July 2022, the Australian Prudential Regulation Authority (APRA) released an updated Investment Governance Prudential Standard, SPS 530 that commences shortly on 1 January 2023. APRA announced that superannuation fund trustees, “must maintain a sound investment governance framework, which focuses on managing relevant risks and returns.” 

Why is investment governance important? 

Investment governance sees that investments are managed in a way that is aligned with the goals and objectives of the investor. It helps to establish a clear framework for decision-making and accountability, and to manage the risks associated with investing.

This ensures that the goals of the investment are met and that the safety and security of the investment are maintained, enabling improved visibility, confidence, auditability and traceability of changes across investment data. 

Michael Drew and Adam Walk provide a good definition of investment governance in their CFA Institute Research Foundation Monograph Investment Governance for Fiduciaries:  

Investment governance refers to the effective use of resources—people, policies, processes, and systems—by an individual or governing body (the fiduciary or agent) seeking to fulfill a fiduciary duty to a principal (or beneficiary) in addressing an underlying investment challenge. 

Investment governance requires having alignment between the trustee board and the investment management team, the organisation and third-party providers, and, most importantly, the trustee board and the members. 

The Chartered Financial Analyst (CFA) Institute outlines that an investment manager’s loyalty should always be with the investors of the fund – the clients. 

“The interests of those clients must always come first, and the competing interests of the firm or other entities will always be secondary to serving the client,” states the CFA Institute.

Investment governance is vital for a superannuation fund because it governs the relationship between the trustee and the member on whose behalf the trustee is working. As a result, investment governance supports the delivery of member outcomes.  

This emphasises the importance that must be placed on the fact that funds and trustees are managing thousands of people’s retirement savings. 

A fundamental principle in the Australian Institute of Superannuation Trustees’ revised Governance Code released in August 2022, calls for strong investment governance practices that require superannuation funds to “establish an investment framework to deliver appropriate retirement outcomes for its members”. 

Prudential Standard SPS 530 Investment Governance 

SPS 530 requires superannuation funds “to have in place a sound investment governance framework for the selection, management and monitoring of investments”. The investment governance framework is the foundation for how superannuation funds structure and operate their investment activities in a manner consistent with their members’ best interests. 

The key requirements of SPS 530 are that an RSE licensee must: 

• Formulate specific and measurable investment objectives for each investment option, including return and risk objectives.
• Develop, maintain and implement an effective due diligence process for the selection of investments.
• Determine appropriate measures to monitor and assess the performance of investments on an ongoing basis.
• Review the investment objectives and investment strategies on a periodic basis.
• Develop, maintain and implement a comprehensive investment stress testing program. 
• Formulate a liquidity management plan.
• Develop, maintain and implement an effective valuation governance framework.  

The main changes in the revised SPS 530 relate to stress testing, valuation and liquidity management practices.  

Given it is not long until the enhanced standard takes effect, superannuation funds should be well down the path of making the required changes to the investment governance frameworks and operations, including: 

• Clarifying the role and delegations of the Board and management in investment decision-making and oversight. 
• Review their existing stress-testing program against the new requirements and commence steps for implementing a valuation governance framework. 
• Ensuring they have the appropriate level and quality of investment data which is sufficient for the new requirements—especially under stress testing. 

Another of APRA’s enhancements has been to include the word ‘maintain’ wherever there is a requirement to ‘develop and implement’ frameworks, policies and processes. APRA is making it explicit that implementing investment governance is not a “one-and-done” exercise, and they expect trustees to take an iterative and dynamic approach to investment governance. 

APRA also flagged that updated prudential practice guides are being developed to assist trustees in the implementation and application of the revised standard and will be released in the coming months. We are still waiting for these. 

Finally, superannuation fund trustees should pay heed to the words of Drew and Walk, “great investment governance is more than compliance”. 

AlphaCert can support your organisation to readily adapt to change and ensure full compliance with new legislation. Control your data with confidence as a superannuation fund. Get in touch with AlphaCert today to find out how we can help you keep compliant.