SPS 530: a new APRA investment headache for super funds

If you’re a product manager for a super fund, you’ve heard about SPS 530 and are busy working out how to implement it. Well hopefully anyway. If you’re a CEO or board member exhausted from implementing Stronger Super, well no rest for the wicked.

SPS 530 is not a new prescription drug. Rather, it’s APRA’s latest headache for super funds to deal with, a set of prudential standards for investment governance, which carries particular implications for super wraps. It came as a bit of a shock, pretty much dropping unannounced, and has a very short lead time to implementation.

So where did this come from?

The Superannuation Legislation Amendment Bill 2012 conferred on APRA a prudential standards making power for RSEs. Prudential Standard SPS 530 addresses RSE investment governance – a rigorous and relatively prescriptive set of requirements for the governance of investments, investment strategies, and investment options.

This is going to stretch the resources of all types of funds:

– Not-for-profit funds, which although they benefit from a smaller number of strategies and options available to members, typically have very small teams to manage this through.

– Retail funds, which have larger product teams to manage SPS 530, may have hundreds of investment options which need to be covered.

SPS 530 has 5 main components which will make it challenging to deal with in a short time frame:

– Board responsibilities. Boards must approve overall policies and their appropriateness. So far, no big deal.

– Trustee investment limits for MySuper products. RSEs need to document how the investment strategy is diversified and in compliance with SIS and permissible fee rules. Not a big issue in most cases.

– Investment governance and objectives. A governance framework needs to be developed, and objectives need to be set for the RSE as a whole, and for each investment option. Starting to get more interesting, particularly for funds with large numbers of options.

– Investment strategy and liquidity. Again, for the RSE as a whole, and for each investment option, there need to be policies relating to investments, asset allocation, and rebalancing. There also needs to be a liquidity plan and scenario stress testing. Now that sounds like a lot of work.

– Due diligence and monitoring. RSEs must demonstrate effective due diligence in selecting investments for members, and have effective ongoing monitoring and assessment processes which permit timely interventions when objectives are not being met. Ie you cannot simply set up investment options and then basically forget about them. Fine if you have 6 investment options. Big job to do properly if you have 200. This calls for product management capability, not just investment management.

All of the above is doable, but the big challenge for funds is the short lead time. SPS 530 comes into effect in July 2013, which is just 11 weeks away – not long given the big slate of work involved which is likely to stretch across boards, investment committees, management teams, and outsourced service providers.

It’s already clear that this is stretching the resources of even the largest funds, many of which have been caught largely unaware by what is really quite a significant reform.

It’s also a sign of the increasing management depth which APRA implicitly requires to manage a RSE in a proficient manner. These are classic product management tasks. Retail funds are often well set up to undertake these, but not-for-profit funds generally have small product teams fully allocated on BAU tasks – if indeed they have a product team at all.

It’s another increment to the fixed costs of running a super fund, and another nail in the coffin of small funds which do not have the scale to spread such costs over a wide base of members and assets.