When cash ain’t really cash

Are all “cash options” offered by superannuation funds the same?

The Australian Prudential Regulation Authority (APRA) has revealed that its recent scrutiny suggests that one fund’s “cash” might be another fund’s non-cash investment option.

Facing questioning during Senate Estimates, APRA deputy chair, Helen Rowell acknowledged concern about the seemingly low returns generated by some funds, but pointed to the wide variation in approach and descriptions pursued by superannuation funds.

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She said the regulator was undertaking some work on the “various cash options and the composition of various 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,” Rowell said.

“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.”

Rowell said these were all issues which had been identified by APRA and which were being pursued with the relevant funds where particular products had been identified as “outliers”.

Asked whether APRA’s current regulatory toolkit was appropriate and sufficient to deal with this issue, Rowell said the superannuation framework relied on trustees to set the investment strategy and set the fees and charges that applied.

“The focus of our member outcomes work and the proposals that the government has considered around enhancing member outcomes is really about pushing trustees to think a lot harder about some of those decisions,” she said.

“In that sense, I would say that 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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APRA needs to step up big time. High risk alternative investments, commercial property and infrastructure are labelled as defensive assets by some super funds, resulting in ridiculous asset allocations for investment options labelled 'Balanced'. When the next recession comes, serious questions will be asked about why APRA allowed this to happen.

MTAA did this, only it was 2007-2009 with disastrous results for members, especially with more than 50% illiquid assets, balanced fund circa 85-90% growth. Members lost out, especially those that stayed in as delayed illiquid asset val's kicked in

Why cant we regulate asset allocations to portfolio names. For example a Balanced fund may have 60% Growth assets and 40% defensive assets. A defensive asset is one that provides an income only and has no potential for growth, such as cash. A Toll road is not a defensive asset nor is an Airport or a Super funds premises. A growth asset is one that provides both income and potential for growth, such as property (direct, unlisted, infrastructure or industrial) and shares. If we can regulate the term "adviser" then why cant we regulate what a Balanced fund looks like? How can a retail balanced super fund compare with another Balanced fund who has a 80/20 split?? When I prepare an SOA with a replacement product schedule it looks like I am comparing an apple with a watermelon.

They should bring in a rating system from 1-10. a 10 is 100% growth, a 5 is 50% growth etc. At the moment the bands are too broad, a Balanced fund can have between 60% and 79% growth assets. Comparing a 60% growth portfolio to a 79% growth portfolio is meaningless. The Industry Funds are very clever when it comes to this categorization, nearly all of their default funds are 79% growth assets, often they actually run with a higher allocation than that through the year but then wind it back a bit so they can fit into the category at the end of the financial year. It just such a joke.

Hi Brett. In my comments I deliberately did not mention a certain sector, as I did not want to appear to be biased. But your comments are very spot on. Cheers

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