Some superannuation funds have been loading up their cash options with some decidedly non-cash investments, such as hybrids, as they seek to boost yields. The financial regulator is not happy.

In a letter to superannuation trustees last week, the Australian Prudential Regulation Authority says it has identified superannuation funds where the cash investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature.

Under “reasonable expectations provisions” and APRA’s definition of cash, a super fund member would understand that exposure to a cash investment option would be readily accessible for withdrawal or transfer without change in value.

Assets that APRA has observed forming part of the underlying investments in cash options include asset-backed and mortgage-backed securities, commercial bonds, hybrid debt securities, credit default swaps, loans and other credit instruments.

“These assets do not typically exhibit the characteristic necessary to be considered as cash or cash equivalents,” APRA says.

One of the things that makes asset-backed securities and credit default swaps different from cash is that they can become illiquid, as they did during the global financial crisis, with investors unable to sell them or only able to sell them at a deep discount. Hybrids and commercial bonds are traded on markets where their market value can fall below their face value.

APRA says it also found a number of cash options where the investment policy framework permitted investments in non-cash assets, although there were no material exposures observed.

APRA says it will be following up with some super funds as a result of the review and it will be taking a closer look at super fund cash investments during the normal course of its supervisory activities.

Under APRA’s Superannuation Reporting Standard, cash “represents cash on hand and demand deposits, as well as cash equivalents. Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.”

For super fund members, such as retirees, who may want easy access to their cash holdings, the best course of action would be to contact their fund and ask what is in the cash portfolio.