Topic Paper 5 - Asset Allocation

About this paper   

This paper (Topic Paper 5) provides detail on draft “Reporting Standard SRS 550.0 Asset Allocation” (SRS 550.0).

The Superannuation Data Transformation (SDT) project is a key pillar in delivering APRA’s strategic focus on improving member outcomes. APRA’s heat map and other analysis indicates that there is significant scope for more granular data on asset allocation to enhance the ability of Registerable Superannuation Entity (RSE) licensees to undertake their outcomes assessments. More granular asset allocation data will also enable RSE licensees and APRA to focus in on where change to investment strategy and governance is most needed.

Improving the granularity and transparency of asset allocation data will assist APRA in assessing the investment risks and exposures undertaken by a RSE licensee in meeting its strategic objectives. It will also improve the comparability and consistency of asset allocation data, to better enable APRA to identify and monitor emerging investment trends and risks across the superannuation industry and the broader financial services sector.

Draft SRS 550.0 proposes to expand the reporting of asset allocation data to choice products and options. This is intended to provide a complete picture of investments at the investment option level, and allow enhanced monitoring and assessment of liquidity, investment risk and the effective implementation of investment strategies across the superannuation industry.

Topic Paper 5 provides details of the proposed changes to reporting requirements regarding asset allocation including:

• objectives of the proposed changes;
• the current state;
• drivers for change;
• the proposed state; and
• specific areas of the proposals that APRA is requesting feedback on.

The proposals in this paper should be read in conjunction with the Discussion Paper “Superannuation Data Transformation”¹ released on 7 November 2019 and the draft reporting standard SRS 550.0. A summary of the key changes proposed to reporting on asset allocation is provided in Appendix 1.

APRA recognises the impact that COVID-19 is having on the superannuation industry. However, the proposals outlined in this paper are critical as they will ensure that the gaps in the current data collection are addressed.

Recognising the impact of COVID-19, in addition to undertaking a formal submission process (refer below), APRA will adopt a flexible approach to consultation to help facilitate stakeholder feedback. This will include:

• consolidated feedback through respective industry bodies;
• roundtable discussions;
• forums and webinars; and
• bilateral meetings. 

APRA will also undertake a voluntary pilot collection of the data set out in draft SRS 550.0. While the pilot data collection is voluntary, APRA considers the process of working through the data collection is an essential component of the consultation as it will enable RSE licensees to provide comprehensive feedback on proposed changes.

Formal written submissions for Topic Paper 5 close on 16 October 2020.

Footnotes:

^1. https://www.apra.gov.au/discussion-paper-superannuation-data-transformation-phase-1

Chapter 1. Introduction

1.1 Background

Over the last decade, the superannuation industry has grown in size and importance in the Australian economy, with total assets of superannuation entities increasing from $1.1 trillion to $2.9 trillion. The evolution of the superannuation system has been accompanied by continued consolidation of RSE licensees and RSEs, with large and more complex entities managing the retirement benefits of most Australians. In this context it is critical that regulators and other stakeholders have access to data that appropriately reflects the size, nature and complexity of the industry.

Access to data of sufficient breadth and depth is essential to adequately assess all aspects of the superannuation industry’s operations and the progress of RSE licensees in improving outcomes for members. 

To ensure the superannuation reporting framework is fit for purpose the SDT project will seek to improve the breadth of the data collection in Phase 1, with the depth of the data collection to be improved in Phase 2. Phase 3 of the SDT project will refine the quality and consistency of data reported in the first two phases.

1.2 Drivers for change

The key drivers for change through the SDT project are outlined in the November 2019 Discussion Paper. Key objectives include improved accountability of the industry and more informed analysis and assessment of the performance of the superannuation industry by stakeholders.

For Topic Paper 5, the key drivers are to address gaps in the current reporting framework relating to asset allocation data in respect of all superannuation products provided by RSEs. Addressing these gaps will enhance:

• comparability across all investments held by RSEs, including the risks and exposures being undertaken by RSEs;
• consistency and granularity in reporting of asset allocation, particularly in relation to asset class characteristics; and
• the ability of RSEs to undertake their outcomes assessments through access to enhanced data on key forward-looking drivers of member outcomes.

Phase 1, for which this paper has been prepared, will seek to address current data gaps in the reporting framework. By addressing these gaps APRA, the industry and other stakeholders will be able to appropriately assess member outcomes, industry operations and performance.

Improvements to the reporting framework seek to facilitate and support a competitive, transparent, well-governed, resilient and efficient superannuation industry comprised of RSE licensees able to deliver quality outcomes for members to and for their retirement.

1.3 Objectives of the proposed changes

APRA is seeking to:

• facilitate comparison of investment strategies of investment options through increased granularity of the asset class characteristics across all investment options (MySuper and choice products and options);
• support the assessment of RSE sustainability and strategy, including member outcomes assessments; and
• Improved transparency through expanding the publication of asset allocation information to the investment option level.

Chapter 2. Asset Allocation

Through draft SRS 550.0, APRA is proposing to significantly enhance and expand the existing collection of asset allocation data to capture all investment options, including MySuper and choice products and options. An increased level of granularity is also proposed, which will capture more granular asset class characteristics and additional detail on exposure and derivatives data.

It is proposed to collect the data under draft SRS 550.0 on a quarterly basis as at 31 March, 30 June, 30 September and 31 December.  The due date will be aligned with other quarterly collections.

2.1 Coverage of data collection

Existing requirements

Asset allocation data is currently collected at the RSE level and for MySuper investment options and select investment options².

Proposed changes

APRA proposes to extend the collection of asset allocation data to capture all investment options³. As strategic and actual asset allocation data is a fundamental representation of the exposures and risks of investments undertaken by RSEs, expanding the collection of this data to all investment options is essential for robust assessment and analysis of the outcomes being delivered for all members.

Collection of strategic asset allocation data enables APRA to better understand the investment strategy of each investment option, and allows a comparison of products with similar risk profiles. The formulation and implementation of an investment strategy is a key component of the investment governance framework. Collection of actual asset allocation data is essential in determining whether an RSE is investing consistently with its stated strategic asset allocation and, therefore, the investment objectives communicated to its members.

2.2 Strategic asset allocation levels

Existing requirements

Strategic asset allocation information is collected for MySuper and select investment options under the current reporting standards.

Proposed changes

APRA proposes that strategic asset allocation data would be able to be captured at two levels of granularity:

• a higher-level strategic asset allocation, akin to that which is currently reported; and
• a more detailed strategic asset allocation, which captures more granular information to be reported within the higher-level categories.

The introduction of the more detailed strategic asset allocation concept allows entities to report information in more granular components, enabling a clearer view which better reflects the investment governance processes and decisions undertaken. For instance, where the high-level strategic asset allocation may only provide information on the allocation to a broad asset class (such as property), the more detailed strategic asset allocation could provide information on the allocations to different asset listing and domicile types within that asset class. Further to this, the more detailed allocation may better align with the more granular approach adopted by some RSE licenses for determining strategic asset allocation.

The proposed reporting format provides a more complete picture of the risks and exposures for the investment strategy of each investment option. This allows for more accurate comparisons between options with similar risk profiles by RSE licensees in undertaking their annual outcomes assessments.

APRA anticipates entities will report at both levels of granularity. In instances where further granularity is not required to accurately describe the investment strategy of the option, the entity would report these investment options with the “Same as the high-level strategic asset allocation” flag.

2.3 Strategic asset allocation – Currency exposure

Existing requirements

The current reporting standards collect currency hedging ratios as a variable within the strategic asset allocation collection. Where the RSE licensee sets a currency exposure target at the investment option level (as opposed to currency hedging targets at the asset class level), they report the same currency hedging ratio for each internationally domiciled asset class.

Proposed changes

APRA proposes to introduce “currency exposure” as a new asset class category. This category is to be used for investment options where the RSE licensee sets a currency exposure target at the investment option level. In such cases, entities no longer need to report currency hedging ratios at the asset class level.

Investment options which do not have a currency exposure target set at the investment option level will not need to report information under this asset class and should continue disclosing any currency hedging ratios applicable to each asset class.

Capturing the currency exposure target as a single variable will improve the interpretability of the data, ensuring that instances where these targets are set are explicitly reported and clearly differentiated from currency hedging ratios set for each asset class.

2.4 Asset class subsectors

Existing requirements

The current reporting standards collect directly and indirectly held investments via seven asset classes (including an “other” category), with the respective investment’s domicile and listing type. Fixed income is the only asset class to which further characterisation is applied, with the type, term and currency of the instruments captured.

Proposed changes

APRA proposes to introduce additional granularity to the collection of investment characteristics in the form of a series of asset class subcategories. These subcategories seek to differentiate investments in each asset class based on variations in the risk/return profile resulting from characteristics including, but not limited to, expected and realised volatility, expected returns, income and capital growth, capital stability, downside protection, and liquidity.

Capturing these characteristics will enable deeper understanding of the risks and exposures of the investments of each option and the RSE as a whole. Furthermore, this information better enables APRA to monitor market exposure trends from an industry wide perspective.

2.5 Synthetic exposure

Existing requirements

The existing reporting standards collect information on the effective exposure of directly and indirectly held investments by their respective asset class.

Proposed changes

APRA proposes to also collect the synthetic exposure⁴ of each investment in addition to its effective exposure. This will enable APRA to understand the purpose of derivative positions, in addition to enabling the total market value of the physical component of the investment in the asset class to be derived. 

This added granularity will enable APRA to understand the profile of the effective exposure of the investment and, as a result, better evaluate its risk.

2.6 Investments

Existing requirements

Asset allocation data for directly held and indirectly held investments is currently captured in the reporting standards. In addition, the reporting standards also capture data regarding the proportion of assets managed through individually managed mandates and, in the case of indirectly held investments, the investment vehicle type through which the investments are managed. 

Proposed changes

APRA proposes to consolidate the reporting of asset allocation investments data for directly and indirectly held investments into a single table. Additionally, the characteristics of the investments will be required to be reported using the asset class sub-categorisations outlined above.

2.7 Currency exposure

Existing requirements

Information regarding currency exposure by individual currencies is not collected under current reporting standards.

Proposed changes

APRA proposes to capture the value of assets domiciled in foreign currencies.

APRA expects that RSE licensees have mechanisms to address potential risks arising from currency exposures within its investment strategies, in addition to regular reporting on such exposures and regular monitoring of hedging strategies and their impacts on the liquidity of the RSE. Collection of the exposures to currencies at this level will assist APRA in monitoring and assessing these processes.

2.8 Derivatives and counterparties

Existing requirements

Currently RSE data on exposure to derivatives and the counterparties for these contracts are collected on an annual basis, along with the total value of assets pledged to secure these derivative positions and how those assets are attributed to each counterparty.

APRA also collects information required by the Australian Bureau of Statistics (ABS) on derivatives to develop publications that comply with international standards⁵. A key item in this form is detailed counterparty information, required under the System of National Accounts.

Proposed changes

APRA proposes to make a number of changes regarding the collection of data relating to derivatives and the associated counterparties to these contracts including:

• the collection of derivative financial instruments and details of directly held over-the-counter (OTC) derivatives as a consolidated item. This is a minor change which seeks to avoid duplication of data and minimise reporting burden;
• the collection of a unique identifier for each counterparty. Unique identifiers improve consistency in reporting between periods, removing the difficulties inherent in matching this currently text-based data. This will also assist entities in correctly identifying counterparties and reporting accurately;
• the collection of information describing the type of collateral pledged to secure positions with counterparties. Granularity in this area assists in accurately reflecting the total exposures of the RSE through the derivative positions it enters into; and
• consolidating derivatives reporting currently collected under the reporting standards used by the ABS and APRA under a single reporting standard.

Growth/Defensive Categorisation

APRA considered the inclusion of metrics capturing the essential properties of assets identified as either “growth” or “defensive” in nature as part of this phase of the SDT project. Such metrics would potentially give additional visibility to the exposures and risks undertaken by RSEs and assist APRA and other stakeholders in making assessments of an RSE’s investment strategies.  As part of considering its approach, APRA has engaged with the working group of industry participants that currently has material out for consultation⁶.

There are a number of complexities inherent in formulating a robust and effective methodology for classification of assets as growth/defensive that can be applied consistently across the superannuation industry. APRA has therefore decided to first consult on proposals for more consistent reporting of investments by defined asset allocation categories, as set out in this Topic Paper 5. A separate consultation on growth/defensive classification of assets may be considered as part of Phase 2 of the SDT project.

Liquidity Measures

As part of the Pandemic Data Collection (PDC), APRA collected investment option level liquidity data.

Investment option level liquidity data is not included in this draft reporting standard, however APRA may include this in the final reporting standards dependent on the learnings from the PDC. Specifically, APRA may propose to collect liquidity profile at asset class level for investment options, based on the following liquidity buckets: 3 days or less, 4-30 days, 31-90 days, 91-180 days, greater than 180 days liquidity. Feedback on RSE licensee’s ability to provide this asset class liquidity information would be welcomed.

footnotes:

² A “select investment option” is an investment option that constitutes 5% of the RSE’s assets or has assets over $200m in value.

³ As noted in ‘Topic Paper 1: RSE Structure and Profile’, APRA is seeking reporting on direct investments at a collective level, based on those direct investments which have a common fee structure, investment option category and description in related disclosure.  

⁴ Synthetic exposure refers to an exposure to a physical asset which is synthetically generated via a derivative financial instrument. The value collected in this variable refers to the dollar amount of the underlying physical asset that needs to be held to generate the same return as holding the derivative.

⁵ The System of National Accounts and the Balance of Payments Manual.

⁶ Growth/defensive asset categorisation - https://theconexusinstitute.org.au/resources/growth-defensive/

Chapter 3. Overlap with existing reporting standards

There is overlap between data to be collected through the draft SRS 550.0, and:

• SRS 530.0;
• SRS 533.0;
• SRS 533.1;
• SRS 534.0; and
• SRS 722.0.

APRA will consider granting exemptions from reporting these data items under existing reporting standards or, where relevant, discontinuing collection under an existing reporting standard, to the extent that new reporting standards duplicate data that is already collected.

Chapter 4. Proposed non-confidentiality determination

APRA’s SDT project will lead to significant changes to reporting requirements.  As a result of these changes, APRA is considering whether the data reported under the Financial Sector (Collection of Data) Act 2001 (FSCODA) should be determined to be non-confidential and publically accessible.

APRA is generally able to publish aggregate industry-level data without restriction. To achieve the objectives of the enhanced superannuation data collection, which includes improved accountability of the industry and more informed analysis and assessment of the performance of the superannuation industry by stakeholders, it will be necessary to publish data at an individual entity, product and investment option level.

Under section 56 of the Australian Prudential Regulation Authority Act 1998 (APRA Act), data reported to APRA under FSCODA is protected information and generally cannot be disclosed at an entity level, unless APRA determines the data to be non-confidential.

However, section 57 of the APRA Act permits APRA to make a determination that data provided in a particular reporting document, which has been submitted in accordance with a reporting standard made under FSCODA, is non-confidential. APRA may make such a determination if it considers the benefit to the public from the disclosure outweighs any detriment to commercial interests that the disclosure may cause.  

FSCODA also requires that APRA must not make such a determination unless it has:

• given interested parties (bodies or associations representing the relevant kind of financial sector entity) a reasonable opportunity to make representations as to whether information of the kind that is proposed to be released is confidential; and
• taken any such representations into account.

APRA proposes to determine under section 57 of the APRA Act that all data collected under SRS 550.0 is non-confidential.

Data which APRA determines to be non-confidential can, when published, identify individual entities but will not breach the privacy of individual members.  The scope of the proposed publication of data and treatment of privacy protection in public data releases will be set out in the Phase 1 Consultation Response.

Reasons for the proposed determination

The data to be collected under draft SRS 550.0 will provide essential material to fulfil the objectives of the SDT project. Publicly releasing draft SRS 550.0 data at an entity level will provide necessary information on to allow APRA, other regulators and industry stakeholders to understand and assess RSE sustainability and strategy and facilitate comparison of investment strategies of investment options.

APRA intends to release proposals with regards to publication and sharing of data for the proposed data collection later in 2020.

4.1 Feedback sought on confidentiality proposals

As required under subsection 57(3) of the APRA Act, APRA seeks submissions from RSE licensees and other interested parties on whether data to be collected under SRS 550.0 should remain confidential. The submissions should include:

• details of the data items that should remain confidential (if any);
• information on how the disclosure of that information would lead to detriment to member interests, and the extent to which that could occur; and/or
• information on how the disclosure of that information might lead to detriment to RSE licensees or other parties’ commercial interests.

Chapter 5. Consultation questions: Asset Allocation

Comment is invited on the proposed reporting changes outlined in this paper, and the draft reporting standard, specifically in the below areas:

Questions

1. What difficulties, if any, may be caused through the implementation of draft SRS 550.0 and how could they be addressed or mitigated?
   
    
2. Do the proposed asset class subsectors provide the ability for investments to be effectively differentiated with respect to their risk/return profile variations, and if not, what changes would address this?
   
    
3. Whether the additional layer of detailed strategic asset allocation reporting helps in reducing any limitations experienced in accurately reporting strategic asset allocation information.
   
    
4. What difficulties, if any, may impact the ability to provide investment option level liquidity data that was required in the PDC, should APRA may include this data in the final reporting standards dependent on the learnings from the PDC? How could these be addressed or mitigated?
   
    
5. The estimated cost implications from an implementation perspective of the increased frequency of submissions of Derivatives data required in SRS 550.0 from annual to quarterly, as well as the increased granularity of reporting. 
   
    
6. Feedback as outlined in item 4.1 Feedback sought on confidentiality proposals. Please ensure feedback is specific on which data items should remain confidential and any detriment to member or commercial interests.  

5.1 Submission of responses

Written submissions on Topic Paper 5 should be sent by 16 October 2020, preferably by email to superdatatransformation@apra.gov.au. Alternatively, submissions can be mailed to:

General Manager  

Data Analytics & Insights

Cross-Industry Insights and Data Division  

Australian Prudential Regulation Authority

GPO Box 9836 

SYDNEY NSW 2001

5.2 Submission of pilot data

Through Phase 1 of the SDT project, APRA is seeking to collect pilot data on a voluntary basis to test and inform areas for clarification prior to finalising Phase 1 reporting standards.  As the pilot data is based on draft reporting standards, this data is not collected under the auspices of FSCODA and will be submitted on a best endeavours basis. 

While provision of the pilot data is not mandatory for entities, past experience has indicated that it is difficult for the industry to provide comprehensive feedback on proposed data collections without actually working through the process of providing of the data and so we view the pilot collections as a fundamentally important part of developing an effective and enduring data collection.

Each Topic Paper will be accompanied by draft reporting standards, a reporting template to collect pilot data, specified reporting periods for RSE licensees to provide data in the template and due dates for submission.

Following the collection and review of the Phase 1 pilot data, an updated data template will be provided to entities for completion to further test and clarify the draft reporting standards.

Following the first data collection after the Phase 1 Reporting Standards have been finalised, APRA intends to publish the data received.  It is intended that the released data will assist RSE licensees in meeting their obligations under SPS 515. It will also inform Phases 2 and 3 of the SDT project.

This table summarises the key features of the initial pilot data collection for this topic paper: 

Appendix 1 – Key changes proposed to asset allocation reporting