The extension of the stress testing requirements recognise that new investment risks can quickly arise and RSE licensees must be well equipped to withstand severe market and other dislocations, whilst still meeting obligations to their members. The amended requirements impose additional formality on the stress testing program, including the obligation that roles and responsibilities (both internal and external) be defined and that stress-testing programs are board approved. Importantly, there is a requirement that stress testing be applied across the option suite, and that it specifically considers adverse scenarios for options, and is performed annually. The documentation for the stress testing program should include:

• Methodology, assumptions, and risk factors
• Metrics and outputs for testing performance
• Regular review of methodology and assumptions
• Circumstances for triggering ad-hoc stress testing
• Processes for ensuring the reliability of input data.

There also must be an explanation of how stress testing results are applied to investment decision making and results should regularly be reviewed by the board and relevant committees.

Key issues for RSE licensees to consider:

• Does your stress testing framework cover the entire option suite?
• Have appropriate adverse scenarios been identified for testing?  
• Who has the responsibility for determining the scenarios?
• Are the methodology, assumptions and risk factors clearly defined and explained?
• How frequently are these reviewed?
• Under what circumstances will you perform ad-hoc stress testing? 
• Does the framework clearly outline who will make this decision and the process that needs to be followed?
• What is done with stress testing results? Who receives the results and determines whether further action is required?
• Have you tested the reliability of the input data?
• If relying on stress testing provided by an external investment manager, is the board able to assess the appropriateness of methodologies and assumptions used in the stress testing process?

The management of liquidity risk became an even bigger priority at the beginning of the pandemic, with potential liquidity concerns being exacerbated by the Early Release of Superannuation scheme. These concerns didn’t come to fruition across 2020, in part due to the existing liquidity and cash flow provisions contained within the existing SPS 530 standard.  Introduced in 2013, the original SPS 530 required RSE licensees to develop a better understanding of the drivers of liquidity risk and a methodological approach to managing liquidity in adverse circumstances. The recent updates to SPS 530 will require that RSE licensees identify personnel responsible for the management and oversight of liquidity risk and include liquidity stress testing as part of the comprehensive stress testing program. Lastly, it outlines key metrics to be reported on and periodically reviewed by the board, relevant board committees and senior management.

Key issues for RSE licensees to consider:

• What actions will you take when a liquidity event occurs?
• Who has responsibility for making key liquidity related decisions and implementing them?
• Do you have a liquidity stress testing program and is it reviewed regularly?

As highlighted in APRA’s thematic review of valuation processes, RSE licensees are required to implement greater rigour in valuation processes and identify areas of the valuation process that need immediate uplift. Consistent with broader changes to SPS 530 there must be a documented framework addressing valuation risk including the structures, processes, procedures, and controls. As with the other amendments, there is a new requirement to clarify roles and responsibilities in relation to valuation and key metrics for monitoring and reporting of valuations. The updated standard also calls for:

• Valuation methodology for each asset class, including the source of valuation inputs
• The framework around the use of external valuations
• Circumstances in which external valuations will be required
• Frequency
• Triggers for interim revaluations
• Validation of valuations and the circumstances which would lead to the rejection or reassessment of a valuation, and the process for obtaining an appropriate valuation in such a circumstance.

APRA intends to release a draft SPG 531 during Q4 2022, which will provide further guidance around valuation governance, methodology, frequency, monitoring, and the types of valuation risk.

Key issues for RSE licensees to consider:

• Can the economic basis of valuations be explained, by asset class?
• Under what circumstances will a valuation be rejected or updated?
• How will this be actioned?
• What are the indicators? How are they measured?
• What is the decision-making process? Who decides?
• Is there a valuation committee? What is its charter and operation?