A proposal by the Australian Prudential Regulation Authority for large super funds to disclose all of their holdings, even those requiring a “look through” their units in trusts, has raised several concerns by custodians on behalf of their clients.

While not being opposed to the proposal’s aim of greater transparency, in line with what is generally considered to be world’s best practice in pension fund governance, there are some specific potential problems for super funds.

Paul Khoury, the deputy chair of the Australian Custodial Services Association and operational chief of custody at State Street in Australia, says that the ACSA executive members believe operational and possible legal challenges could result because:

• Currently, there are no standardised guidelines or formats on investment data, which may result in variability in the quality and consistency of the information across the industry.
• Some funds manager agreements with super funds will have non-disclosure conditions, which may create legal impediments in sharing information with third parties as well as members.
• Some third-party administrators will need to invest in systems to automate the collection and reporting of information. This will result in additional costs which will either have to be absorbed by the administrator, the fund or passed onto members.
• Valuation standards vary between super funds’ audited accounts and the day-to-day valuation of assets. As a result there may be challenges in reconciling valuation data given to members with that contained in the super fund’s accounts.
• APRA returns will need to be audited, which may pose some timing issues around publication as well as inter-dependencies between auditors in funds-of-funds structures.
• ACSA will make its concerns known to APRA by the required response date of November 15 but is not expecting immediate amendment to the proposal.

Another problem for custodians, which will be exacerbated if the new proposal is brought in, is that when their clients are using big international managers they may not have the influence to force those managers to provide additional information outside their normal practices.

Even in Australia, super funds will often be invested in trusts and have no legal entitlement to information on the underlying assets. If the trusts are unlisted, such as property, infrastructure or private equity, the manager may not be regulated by APRA, which could therefore not enforce the regulation.

Khoury says that most of the information required will be readily available for custodians but ultimately the proposal will lead to increased costs and increased inefficiencies because the information is being collected from multiple sources.