Risks in Australian Pension Funds' Private Asset Allocation: Regulatory Scrutiny and Liquidity Risk Management

Australia's superannuation system, a cornerstone of retirement savings for millions, has increasingly turned to private assets like property, infrastructure, and unlisted equity to chase higher returns. However, this shift has drawn sharp regulatory scrutiny, particularly from the Australian Prudential Regulation Authority (APRA), which has flagged significant risks in valuation governance and liquidity management. With APRA-regulated superannuation entities holding approximately A$2.7 trillion in assets—nearly A$500 billion of which is allocated to unlisted assets—the regulator has intensified its focus on ensuring robust frameworks to protect members' savings, as set out in APRA's governance report.

Regulatory Scrutiny Intensifies

APRA's updated Prudential Standard SPS 530, introduced in January 2023, mandates stricter governance for unlisted asset valuations and liquidity risk management, as described in an APRA review. The standard requires trustees to establish independent valuation processes, diversify liquidity triggers, and implement comprehensive action plans to address cash flow pressures. A thematic review conducted in late 2023 revealed alarming gaps, with 12 of 23 assessed trustees—representing 80% of assets under management—requiring material improvements, according to a Clayton Utz analysis. Key weaknesses included inadequate liquidity stress testing, overreliance on simplistic triggers (e.g., percentage of illiquid assets), and poor oversight of external managers, as noted in a Mirage News article.

APRA Deputy Chair Margaret Cole emphasized that “trustees must ensure they have reliable information on asset values and robust processes for managing liquidity risk to protect members' retirement savings.” The regulator has since engaged directly with underperforming entities, demanding remediation plans to align with SPS 530.

Liquidity Risk: A Systemic Challenge

Liquidity risk management has emerged as a critical concern. Unlisted assets, by their nature, are illiquid and harder to value, creating challenges for funds needing to meet member withdrawal demands. As APRA's governance report notes, many super funds rely on a single liquidity trigger—such as the proportion of illiquid assets in their portfolio—while neglecting broader risks like member switching behavior or market downturns. This narrow approach leaves funds vulnerable to sudden cash flow pressures.

The Australian Securities and Investments Commission (ASIC) has echoed these concerns, urging funds to improve disclosures around private asset valuations, as reported in a Bloomberg report. APRA's review also highlighted conflicts of interest in externally managed assets, where fund managers may prioritize returns over transparency, further complicating valuation accuracy.

Implications for Fund Governance

The regulatory push for reform underscores a broader shift toward accountability. APRA now expects trustees to:
1. Enhance board oversight: Boards must actively monitor valuation practices and liquidity frameworks.
2. Diversify liquidity triggers: Beyond asset percentages, funds should consider behavioral and market-based indicators.
3. Strengthen external manager oversight: Clear governance protocols are needed to mitigate conflicts of interest.

Failure to comply could trigger enforcement actions, as APRA has made clear its willingness to intervene where risks to members' savings are evident.

Conclusion

The scrutiny of Australia's superannuation funds reflects a global trend toward tighter governance of private assets in institutional portfolios. While unlisted investments offer growth potential, their inherent risks demand rigorous oversight. APRA's reforms, though challenging, aim to balance innovation with member protection. As funds adapt to SPS 530, the focus will remain on transparency, resilience, and ensuring that retirees' savings are not exposed to undue risk.