Australia's Super Funds Face New Risk Disclosure Guidelines

(August 2, 2011) — Australia’s super funds have been given new risk disclosure guidelines.

In an effort to standardize the way the superannuation industry discloses investment risk, the Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) have issued guidelines that will provide a ‘Standard Risk Measure’ ranging across seven risk bands, ranging from ‘very low’ to ‘very high.’

“Having a clear understanding of risk is just as important as being aware of fees or returns. With a wide variety of investment options available across a large number of funds, it is essential that investment risk is fully disclosed and comparable,” Financial Services Council chief executive John Brogden said in a statement. “The Standard Risk Measure will ensure consumers are more aware of the investment risk in the option they have chosen and will enable them to compare ‘apples with apples’ when looking at different investment options.”

According to a release from ASFA, the Australian Prudential Regulation Authority (APRA) will require superannuation funds — starting in June next year — to identify and disclose, on a standardised basis, the risk of negative returns over a 20-year period for each of their investment options.

ASFA chief executive Pauline Vamos added that the Standard Risk Measure Guidance Paper would help super trustees approach risk disclosure on a consistent basis and assist fund managers to better understand trustees’ requirements. “The release of this Guidance Paper is a key part of the increased transparency in ‘true to label’ reporting that consumers will see from the current superannuation reform process,” Vamos stated.

The urgency among Australia’s superannuation funds to provide greater transparency around investment risk reflects a greater awareness and sensitivity to risk within the industry. A recent study by Northern Trust, for example, shows institutional investment managers are growing increasingly averse to risk, with 42% of managers surveyed by Northern Trust saying they were more risk-averse than they were one quarter ago.

“It appears that our managers are becoming increasingly concerned that economic growth may be hitting a soft patch, a view that we’ve seen reflected in their more cautious approach towards risk,” said Chris Vella, Global Director of Research for Northern Trust’s multi-manager investment solutions business, in a statement. “Although their general outlook remains favorable for the remainder of the year, the mixed signals coming from the economy seem to have slightly recalibrated their expectations.”

Meanwhile, European pension schemes are planning to de-risk, according to research by Aon Hewitt. Its findings — outlined in its Global Pension Risk Survey 2011 — revealed that pension funds around Europe have placed de-risking at the top of their list of priorities. The survey discovered that more than half of respondents are looking to fund their deficits solely through employer contributions. Meanwhile, the survey noted that risk is being taken in a more sophisticated way than in previous years; today, employers are seeking alternative asset classes to provide higher returns with lower risks.

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