What ASIC’s warning on super fund valuations means for retirees

ASIC says super funds are leaning too heavily on external managers to value unlisted assets, and stale prices can quietly shift money between members who leave and members who stay, while smoothing flatters returns.

The corporate regulator has just fired a shot that deserves the attention of anyone with money in a default superannuation account, which is to say almost all of us.

In a review of the industry it published this month, ASIC warned that super funds are not scrutinising the value of their unlisted assets closely enough. They are leaning too heavily on the external managers who run those assets to tell them what they are worth.

Trustees cannot outsource responsibility for ensuring investment valuations are accurate and reliable, as the regulator’s Kate O’Rourke put it. That sounds like a dry accounting matter. It touches something that quietly affects the balance on your statement and the fairness of the entire system.

What an unlisted asset is

Let’s start with what an unlisted asset is.

Your super fund does not only own shares and bonds that trade on a market like the ASX. It also owns things like airports, toll roads, office towers, power networks and stakes in private companies. No exchange lists these assets, and so they carry no price ticking away on a screen.

You can value a share in one of the big banks in an instant, because the market tells you what it is worth every second of the day. You cannot do the same with an airport. Its value is an estimate.

A valuer arrives at it or, alternatively, the manager who runs the airport and gets paid to do so. The fund updates that estimate only now and then, perhaps once a quarter and sometimes with a lag, rather than moment to moment.

ASIC’s concern is that funds have been accepting those estimates too readily, without properly testing the assumptions behind them. That is exactly the soft spot the regulator has decided to press on.

The smoothing effect

This matters to you in a couple of very practical ways. The first is something the industry rarely says out loud, which is smoothing.

Because funds value unlisted assets infrequently and by judgement rather than by the market, their values tend to move in gentle steps rather than the jagged lines of the share market. A fund with a lot of these assets therefore looks wonderfully steady, falling less in the bad years and gliding along in the good ones. The industry has marketed that steadiness hard as a virtue.

Some of it is genuine, because a toll road really is a more stable business than a speculative tech share. But some of it is an illusion that the infrequency of the pricing creates.

Fairness between members

The second point is about fairness between members. It is the issue ASIC is really circling.

Imagine your fund holds an office tower on its books at a value that, in truth, is now too high. The revaluation has not caught up with a falling property market. Every member owns a slice of that tower through their balance.

Now suppose you decide to switch funds, or move your money into the cash option, or simply retire and take it out. You leave at a price that still reflects the old, too-high value. You take a little more than your fair share with you. The members who stay hold the tower.

When the fund finally writes it down to its real worth, their balances absorb the loss you avoided. It works in reverse too. If the fund carries the assets too low, the fund short-changes the member who leaves and those who remain quietly benefit.

Either way, when the price you transact at does not reflect reality, the system quietly shifts money from one group of members to another. None of them ever agreed to it.

When markets fall

When share markets crash, the fund marks down the listed half immediately, while the unlisted half can stay at its old value for weeks or months until someone gets around to revaluing it.

A member who panics and bolts to cash in the middle of that window may end up leaving at a price that still reflects yesterday’s valuation on the unlisted assets. That member crystallises the losses on the shares but escapes the ones still to come on everything else, again at the expense of those who hold their nerve and stay.

We saw versions of this during the pandemic. It is a large part of why the regulators have become so insistent that funds keep these values honest and current.

What ASIC wants

None of this means your super is in peril. It is worth saying that the big funds are generally well run and the sums involved for any one member are usually modest.

What ASIC is doing is sensible housekeeping on a system that now holds close to $4.8 trillion of the nation’s savings, a great deal of it in these hard-to-value assets. It wants trustees to stop treating the manager’s number as gospel. They should challenge the assumptions behind it, revalue promptly when the world changes rather than when the calendar allows, and tell members far more about how they reach the figures.

It is the same question we raised recently about private credit, only this time it applies to super itself. When an asset has no market price, its value is a matter of judgement. Whose judgement, how often, and how honestly, turns out to matter enormously.

What members should keep in mind

It is worth knowing roughly how much of your fund is in unlisted assets, because the headline stability of an option stuffed with them may be smoother than the underlying truth.

It is worth being a little wary of reading too much into the short-term returns on those options, up or down, since the numbers lag reality.

And it is worth remembering that the timing of a big switch, whether into cash, across to another fund, or out altogether, is not quite the clean transaction it appears. You may be trading at a price that is a little stale.

None of this is cause for alarm. It is simply a reminder that behind every balance lies a set of judgements about what things are worth, and that the regulator, for once, is firmly on the side of making those judgements more honest.