An RSE licensee must ensure that the appropriateness, effectiveness and adequacy of its investment governance framework are subject to a comprehensive review by operationally independent, appropriately trained and competent persons at least every three years.
The scope of the review of an RSE licensee’s investment governance framework must have regard to the size, business mix and complexity of the RSE licensee’s business operations, the extent of any change to those operations and any changes to the external environment in which the RSE licensee operates.
Investment objectives
18. An RSE licensee must, when formulating the investment strategy for each investment option, set investment objectives that are:
(a) aligned with the size, business mix and complexity of the RSE from which the investment option is offered; and
(b) specific and measurable and, at a minimum, include:
(i) a return objective; and
(ii) a risk objective.
Formulating the investment strategy
19. When formulating each investment strategy for the whole of the RSE, and for each investment option, an RSE licensee must document how it has regard to each of the factors in section 52(6) of the SIS Act.
An RSE licensee must, when determining an appropriate level of diversification for each investment strategy[8]:
(a) identify the risk factors, and sources of return with which the risk factors are associated;
(b) where the strategy includes multiple assets and/or asset classes, identify how sources of returns are expected to interact, the variability in these interactions and the impact of these interactions on the overall diversification of the strategy in different market conditions;
(c) determine the target exposure to the risk factors in paragraph 20(a); and
(d) determine the asset classes and/or individual assets that it will invest in to achieve the desired risk exposure and whether making, holding and realising investments in those asset classes and/or individual assets can be implemented in a manner consistent with the interests of, and the RSE licensee’s duties to, beneficiaries.
21. An RSE licensee must, at a minimum, determine for each investment strategy for an investment option that includes multiple assets and/or asset classes:[\[9\]](#_ftn9)
(a) asset allocation targets and ranges that are appropriate to the investment objectives of the investment option;
Division Review of the investment governance fram - Superannuation (prudential standard) determination No. 2 of 2022 - Review of the investment governance framework | Zoe
(b) the basis on which asset allocation targets and ranges would be changed; and
(c) a policy to monitor and maintain the asset allocation within the determined ranges within a reasonable timeframe.
22. For the investment strategy of a MySuper product, an RSE licensee must also document, in addition to the requirements in paragraphs 19-21 inclusive, at a minimum, how the investment strategy:
(a) is diversified over multiple risk factors and sources of return as required in the SIS Act;
(b) complies with section 52(13) of the SIS Act; and
(c) complies with the relevant fee rules for MySuper products and general fee rules in the SIS Act.[10]
Giving effect to the investment strategy
23. An RSE licensee must have processes and criteria for selecting each investment to give effect to the investment strategy (investment selection process) to ensure that effective due diligence that is commensurate with the nature and characteristics of the investment is undertaken prior to the selection of an investment for an investment option.[\[11\]](#_ftn11)
24. An RSE licensee’s investment selection process must enable the RSE licensee to ensure:
(a) it has sufficient understanding and knowledge of the investment selected, including an assessment of any factors that could have a material impact on achieving the investment objectives of the investment option;
(b) it has sufficient understanding of how the investment is expected to perform under the range of stress scenarios determined under paragraph 31; and
(c) the investment is appropriate for the investment option.
Monitoring investments
25. An RSE licensee must determine appropriate measures, for the purposes of monitoring performance on an ongoing basis, in respect of each MySuper product, each investment option and each investment within an investment option. These measures must include appropriate performance benchmarks and a methodology for setting performance benchmarks. These measures, other than performance benchmarks for each investment within an investment option, must be approved by the Board.
26. An RSE licensee must ensure that the performance of each investment option and each MySuper product is regularly reported to the Board and senior management. This reporting must include an assessment of the sources of out-performance and under-performance relative to appropriate performance benchmarks as determined by the RSE licensee under paragraph 25.
27. An RSE licensee must ensure that persons undertaking the assessment of performance, by applying and assessing the measures required in paragraph 25 are operationally independent from persons who are responsible for making the investment.
Reviewing the investment strategy
28. For each investment strategy, an RSE licensee must have a review policy that is approved by the Board and that, at a minimum, requires each investment strategy to be reviewed against its investment objectives on at least an annual basis. The policy must also include:
(a) the triggers that will cause an interim review of the investment strategy in addition to the annual review;
(b) the processes for reporting the results of each review to the Board; and
(c) the criteria that will determine whether the investment strategy must be changed.
29. On receipt of the results of a review of an investment strategy undertaken in accordance with the review policy, the Board must ensure that any decision to amend the investment strategy is supported by sufficient justification and analysis.
Investment stress testing
30. An RSE licensee must have a comprehensive investment stress testing program that is approved by the Board and is integrated into an RSE licensee’s investment governance framework.
31. An RSE licensee must, at a minimum, determine appropriate adverse stress scenarios for the investment strategy of each option. These adverse stress scenarios must cover a range of factors that can create extraordinary losses or make the control of risk within accepted tolerance level in the investment strategy difficult.
32. An RSE licensee’s comprehensive investment stress testing program must provide for:
(a) investment stress testing performed prior to the implementation of the investment strategy;
(b) investment stress testing based on scenarios determined in paragraph 31 to confirm that each investment strategy, including the targets and ranges set under paragraph 20(c) and paragraph 21(a) remain appropriate on at least an annual basis; and
(c) investment stress testing based on scenarios determined in paragraph 31, and other parameters deemed appropriate by the RSE licensee, to assess the performance of each investment option based on the actual asset allocation on at least an annual basis.
33. The comprehensive investment stress testing program must, at a minimum include:
(a) clearly articulated stress testing objectives, methodology, assumptions, frequency (at least annually), and risk factors, including the rationale for the severity of the adverse stress scenarios as required in paragraph 31;
(b) the roles and responsibilities of persons (both internal and external) involved in the design, implementation, review, reporting and oversight of investment stress testing, including the role of the Board, relevant Board committees and senior management;
(c) investment stress testing output or metrics that demonstrate the performance of each investment option under the stress scenarios required in paragraph 31;
(d) processes for the regular review of stress testing methodology and assumptions;
(e) circumstances that might lead to ad hoc investment stress testing, including triggers to indicate when ad hoc investment stress testing would be undertaken; and
(f) processes for ensuring that relevant and reliable data are used in investment stress testing.
34. An RSE licensee must ensure that the results of the comprehensive investment stress testing program are:
(a) reviewed periodically by the Board, relevant Board committees, and senior management; and
(b) reflected in the RSE licensee’s investment governance framework.
35. The Board must document the methodology for stress scenario selection and how the results of the comprehensive stress testing program have been used in decision-making.
Liquidity and cash flow management
36. An RSE licensee must, at a minimum, have a liquidity management plan, approved by the Board, for each RSE within its business operations that:
(a) covers each investment option in the RSE;
(b) outlines the procedures determined by the RSE licensee for measuring and managing liquidity on an ongoing basis;
(c) includes consideration of how the liquidity of investment options in an RSE can be managed in a range of stress scenarios;
(d) identifies the circumstances the RSE licensee considers to be a significantly adverse liquidity outcome that requires action (liquidity event);
(e) outlines what action the RSE licensee will take when a liquidity event occurs;
(f) outlines the roles and responsibilities of persons involved in the management and oversight of liquidity risk, including the role of the Board, relevant Board committees and senior management; and
(g) outlines information, including key metrics, that must be reported to the Board, relevant Board committees and senior management, to ensure adequate oversight of liquidity risk.
37. An RSE licensee must ensure that information, including key metrics referred to in paragraph 36(g) are periodically reviewed by the Board, relevant Board committees and senior management, to ensure that such information and key metrics remain suitable.
38. An RSE licensee must implement liquidity stress testing as part of the comprehensive investment stress testing program required in paragraph 31 and the RSE licensee’s liquidity management plan.