Curating an Investment Menu – Investment Governance Challenges for Super Trustees

by K&L Gates LLP

Investment governance expectations on superannuation trustees have risen markedly since the introduction of the StongerSuper reforms. All trustees are required to respond but super platforms and other funds with extensive menus of member-directed investment options face the greatest challenge. APRA confirmed this month that such funds will need to carefully curate their investment menus.

Many funds are introducing member-directed investment options in an attempt to offer members the investment flexibility which is achievable through an SMSF but without the associated administrative and regulatory complexity of setting up and running an SMSF. However, trustees are being reminded that giving members a menu of investments to choose from does not absolve the trustee from responsibility for what gets included on the menu.

The recent amendments to the SIS Act and APRA's Prudential Standard SPS 530 require trustees to develop investment objectives and an investment strategy for each investment option, including options consisting of only a single security or managed fund. The option's objectives and strategy needs to address risk, return, diversity, liquidity and a range of other considerations, and trustees are also expected to actively monitor the option's performance against its objectives and strategy.

APRA's draft guidance (contained in Prudential Practice Guide SPG530) confirms investment governance expectations apply to each product on a member-directed investment menu. A platform providing access to ASX200 stocks and external managed funds will need investment objectives and strategies for each option.

Draft SPG530 also requires trustees to consider imposing portfolio constraints on how much of individual members' account balances are permitted to be placed in a particular option to address the need for members to have diversity in investments.

Numerous industry submissions made in response to the release of SPG530 questioned the value of requiring investment objectives and strategies to be set for single security and managed fund options. However, APRA this month confirmed its intention to retain these requirements when issuing the final SPG530. It is hoped the guidance will also clarify what trustees need to do if an investment option (e.g. a particular security) is to be removed from the menu specifically, whether members need to be transitioned out.

The potential downside for trustees that come up short on any of the investment governance requirements is not just the possible APRA related sanctions, it is also the potential exposure to members who are disappointed with the investment performance of individual investment options offered by their superannuation fund. The safe harbor for trustees in respect of claims by members arising out of investment decisions is only available where trustees meet all the requirements of the investment governance standards.

Non-super platforms (whether in the form of IDPSs or IDPS-like schemes) are facing similar, though less extensive, reforms over the next 12 months. Operators will need to disclose their process for including products on the investment menu (including what factors were considered and how often the menu is reviewed). Unlike in the super context, no particular processes are prescribed. However, clients who suffer loss from underperforming products may well still look to the operator and allege its due diligence processes around menu selection and management were inadequate or not followed.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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