Unit pricing – experience from the coalface

Recently we have worked with superannuation clients to help them make improvements to their unit pricing and investment-related processes. During that project, we ran into and addressed a number of the ‘usual suspects’ when it comes to unit pricing-related issues.

With the expectation of both regulators and members for superannuation funds to have their unit pricing and investment processes ‘watertight’, here are three of the ‘usual suspects’ that funds should look out for when it comes to avoiding risks in relation to unit pricing:

The use of best estimates in unit pricing – avoid backdating transactions:

  • The joint ASIC and APRA regulatory guide ‘RG94: Unit Pricing – Guide to good practice’ recognizes that there are various reasons why the exact value of assets for a fund might not be known with certainty at particular points in time. Where this is the case, but the assets may be estimated under a reasonable basis – the best estimate is acceptable to use for unit pricing, and is a preferred approach over the alternative of delaying the processing of transactions and subsequently backdating – which can lead to inequitable outcomes for members.

Clarity of responsibilities and governance:

  • The division of responsibilities for all elements of the unit pricing process should be both:
    1. Clear to all teams and personnel responsible for the unit pricing process; and
    2. Documented and stored internally in a central location that all responsible teams and personnel have access to.
  • Where there is ambiguity or a lack of understanding on which team is responsible for particular elements of the process – this should be clarified and reflected in the relevant governance documentation.
  • Avoid silos and silo mentality between teams. Unit pricing should be a collaborative multi-team exercise.
  • Avoid status quo justification (“we’ve always done it this way”) for the use of systems and models involved in the unit pricing process. All systems and models used or relied upon for unit pricing should have a documented methodology with a principles-based rationale that is understood by relevant team members.

Internal communication and documentation:

  • Teams involved directly and indirectly in the unit pricing process, should regularly communicate with each other on issues/risks and areas for improvements in the process. Avoid sole reliance on risk committees and business analysts to facilitate these discussions and/or identify issues with implications on unit pricing.
  • All elements of the unit pricing process should be documented through a combination of member-facing documentation (PDS’s, investment policies, etc.) and internal process and systems documentation (governance documentation, organisational charts, core processes documentation, procedure manuals, systems and model operator guides, etc). This documentation should be regularly updated and reviewed to reflect current practice and avoid key person dependency risk.

A wide range of material exists for funds to familiarise themselves further when it comes to general problem areas for unit pricing. RG94 is an excellent starting place for those interested in understanding more about these common problem areas and good practice responses.

We look forward to helping more super funds in addressing their specific needs; and to help them more generally to gain confidence and assurance in their systems, policies, and processes; with the aim of ultimately reducing the risk for members, investors, management, and the Board.

Daniel and Thanh


       

Daniel Bartlett and Thanh Phan work on a wide range of superannuation, insurance and wealth management assignments at McGing Advisory & Actuarial.