Be taken seriously. Be consistent with unit pricing and crediting rates

There are two prime challenges with unit pricing for super funds today – namely, the volatility of the market, plus increasing expectations around standards and governance.

In my mind, these are more interconnected than ever. The governance bar for good practice for unit pricing is always rising. The processes, speediness and transparency around ensuring equitable treatment to all members in unit pricing and crediting rates are always on APRA and ASIC’s radar and need to be factored into your standard business toolkit for the immediate future, if not already there.

With the push for more regular revaluations of unlisted assets during highly volatile markets, now is an excellent time to review the processes and calculations being used for unit pricing and crediting rates. The initial shock of COVID-19 has passed. It’s the right time to see how well funds’ systems have managed the market’s response to a pandemic and assess what improvements need to be made.

Early release scheme ramifications for super fund mergers

This assessment is not only current good practice for every fund; it will be crucial for funds considering potential mergers more of which will be on the cards in the future. While there has been some rationalisation of the super industry to date via mergers, the impact of the early release scheme with millions of Australians accessing their superannuation investments will be felt more by smaller funds – some more acutely than others.Many members with less than $10,000 in their super account and facing unemployment have taken the opportunity to clear out their accounts. Lower volumes of administration and asset-based fees, coupled with lower for longer interest rates, and lower long term investment returns, means everyone associated with the fund, from member to custodian to investment manager will be impacted. Potentially a different future for the fund may need to be planned.

More support for the rationalisation of the industry continues with the passing of legislation to provide permanent capital gains tax rollover relief for super fund mergers. Funds considering mergers will need to acknowledge and access efficiencies of scale.  Matching up and mirroring similar investment option types between merging funds equitably for members requires unit pricing or crediting rates to be as frequent and as accurate as possible. If you want to be ready for a merger, either offensive or defensive, then you need to be prepared for this. A fund needs to be operating in effect as close to best practice as you can, which is daily forward unit pricing with minimal investment cash flow and administration processing time lags.

Knowing what you don’t know

Knowing your fund needs assistance with unit pricing or crediting rates can sometimes be challenging to acknowledge. Often the only time it’s apparent that you need help is when things go wrong, and material errors are made. However, the downside here is remediation is very costly in dollars, management time and reputation – sometimes running into the millions of dollars – and can harm a fund’s reputation.

The goal of reviewing unit pricing and crediting rate processes and systems is to ensure they are operating properly. Calculations need to be correct, with no asset-liability mismatching issues: that is member account investment option balances fully matched to  their backing assets at all times. In a post/phase 2 -COVID-19 world, funds need to review the extent to which the asset shocks that arose in March impacted market valuations, illiquidity, volumes of switches as members opted for cash, and any resulting reduction in equity to members and/or cost to the fund from asset-liability mismatching. Funds need to be aware of where any propensity for asset mismatching may be and assess what type of impact this would have if it occurred.

The concoction and risk of complexity

Asset-liability mismatches are difficult to identify and understand. Understanding unit pricing is not simple – in fact, it’s very complicated. It would help if you had a thorough understanding of accounting, investment and administration systems and all of the processes and procedures around every single one of those. There are many players from the custodian to the administrator, to the fund itself and the investment fund managers – with information channelled through all parties in different ways – as shown in the APRA / ASIC Unit pricing: Guide to good practice (RG94).

While in theory unit pricing is dealing with the simultaneous buying and selling of member units, the world doesn’t work that way. Cash flows from the member to the fund and is allocated to the member’s accounts; however, in reality, it’s likely flowing to a cash account first and then onto the investment manager to be invested quickly as one example. This is a major reason why unit pricing and crediting rate reviews aren’t undertaken frequently by internal staff.  Independence is the other.

Prevention is better than cure

Most funds and associated industry players have reasonable controls in place. I believe based on my four decades of experience in unit pricing; many funds can and should do more to reduce risk, improve equity and transparency.

The benefit of using an independent industry expert here is to gain a clear view of your risk reduction capability.  When we as experts deliver reviews and we make recommendations for practical actions. Global markets will remain volatile for some time, and it would be remiss of any fund not to plan for addressing this issue with a consistent approach and methodology. Member switching suddenly into cash will continue and may accelerate again as economic and employment problems further impact the Australian economy as we head out of the initial response to COVID-19 and into a more business as usual yet different economy.


Sean is Managing Director of McGing Advisory & Actuarial and is currently Deputy Chair of the ASFA Victorian Executive. These views are his own personal views.

Sean and the team at McGing Advisory & Actuarial provide a wide range of Superannuation support services including administration, investment, insurance, risk, governance and actuarial advice.