Regulators push for stronger stress-testing capability, resilience

The ability to remain resilient and manage liquidity pressures amid severe, multi-dimensional stress scenarios is an area of focus that APRA and ASIC want superannuation funds to improve.

Recent roundtables hosted by APRA and ASIC heard the importance of how its System Risk Stress Tests (SRST) should be designed and the implications these will have on super funds and the broader financial system.

Super fund attendees, which included representation from NGS Super, Vision Super, Legal Super and Russell Investments, concurred that liquidity management is a key component of stress and systemic impact. The super fund chief executives also acknowledged that owning illiquid assets comes with several challenges.

While the SRST was not a test of solvency, the regulators said the discussions highlighted that the nature of liquidity pressure may change as the system matures and demographic shifts unfold, including the increasing proportion of members entering retirement.

"The operational resilience of material third party service providers was identified as a key amplifier in stress scenarios chief executives agreed that dependencies on third parties such as custodians, administrators, and payment, clearing and settlement systems were potential points of systemic vulnerability," they said, urging for stronger oversight of the service provider chains.

APRA and ASIC emphasised the need for trustees to strengthen their operational resilience to ensure critical services are delivered throughout the supply chain.

The stress test also highlighted the "ever-increasing scale, interconnectedness and importance of the superannuation sector in the Australian financial system."

While superannuation funds usually stabilise markets during stress but can sometimes amplify shocks, APRA said this depends on their response to liquidity pressures and market conditions.

Overall, the regulators have sharpened their focus on system-wide risk in superannuation, warning of growing interconnectedness and operational vulnerabilities.

Super funds, in response, suggested that future exercises may benefit from more targeted scenarios aimed at critical risks to improve the comparability of responses and that there was "general agreement on the value of stress testing for superannuation going forward."

Super funds also acknowledged the need to continue building capability and stress-testing maturity across the industry, particularly for complex and multi-dimensional crises.

Last year, APRA undertook its first SRST for superannuation funds as flagged in its System Risk Outlook report.