Shonky? There is a $372 billion question mark hanging over the real value of unlisted assets held on behalf of Australian workers in Australia’s $2.2 trillion professionally managed superannuation funds supervised by the Australian Prudential Regulation Authority. And two-thirds of this problem, $240 billion, is at the door of the union-dominated industry super funds that the government has been seeking to protect from the transparency that must be extended into this unsatisfactorily secretive area of valuing unlisted assets.

As an industry newsletter warned last month, ‘Australians are unlikely to be impressed when they see that their superfund balances dipped in 2022, but the real valuation of their retirement nest egg could be considerably lower’, And the Australian Financial Review’s Karen Maley last month described as ‘bizarre’ the fact that the superfunds with the heaviest exposure to unlisted assets – the union super funds – are considered among the top performers. Yet, as she noted, unlisted infrastructure and private equity typically carry high debt burdens, meaning that their valuations should tumble when borrowing costs rise. But the latest statistics from APRA show the opposite: while comparable listed assets reflected the 2022 market downturn, unlisted assets showed substantial rises.

There may be more such questionable values of unlisted assets in the other non-APRA superfunds, like self-managed and exempt ones with different reporting rules, that make up the remainder of Australia’s total super fund savings of an astronomical $3.4 trillion as at last December. But with retirees entitled to payouts from their superfunds based on accurate valuations of the assets held on their behalf, and continuing members and new entrants entitled to fair value for their stake in the fund, the surge by the union super funds, in putting multi-billions of dollars of their members money into unlisted assets that have no readily identifiable market value, has become such a major problem that APRA is now trying to fix it – but so far making little progress.

This problem’s rapidly growing significance was strongly underlined in the official annual statistics released last month for 2022  showing a fall in APRA-controlled super funds’ total assets by $104 billion despite their getting in an extra $64 billion of net contributions – mainly compulsory super payments – from members. The funds were protected from a greater fall in value (listed assets like equities, property and infrastructure had dropped $140 billion) by the unexplained (and requiring justification) $46 billion rise in their unlisted equivalent assets. There has been no explanation from the super funds or the regulator as to why the factors that pushed down the value of super fund’s listed assets had no similar impact on equivalent unlisted assets.

Were unlisted assets really immune to what was going on in the real world? Or is it about time super funds came clean on how these assets so successfully avoid a downturn. This is no longer a hypothetical debate among accountants; it is a big deal affecting the value of workers’ potential retirement income with these unlisted assets now making up almost a quarter of the total assets of $1.1 trillion that union industry super funds now manage on workers’ behalf. The union funds’ incongruous result is even stranger when compared with the group of super funds operating in the public sector that also have a similar proportion, 23 per cent, invested in unlisted assets (but with a different redemption profile). These public sector funds have reported that, although not as severe as their 27 per cent fall in listed assets, the value of their unlisted assets also dropped 13 per cent. So why didn’t the same happen at the union funds?

The issue has only become significant with the phenomenal rise of the union super funds’ aggressive move into unlisted assets that has left behind their less-adventurous competitors, the traditional once-dominant pre-Keating retail funds whose unlisted assets of $33 billion are only one seventh of the union funds. They now are a lesser player whose total assets dropped by $53 billion last year to $654 billion while assets of the dominant government-backed union super funds jumped by $110 billion to $1.06 trillion.

Despite the AFR’s concerns about unlisted assets valuations (even before the latest statistical revelations) the union super funds have felt no need to explain to their members why, when their listed assets fell $18 billion, their equivalent unlisted assets rose by $52 billion, much of it in infrastructure shared between local and international projects. Neither the regulator nor the government appears interested in dealing with the ethical question involved in whether or not the potential benefits to building and construction workers of their superannuation nest-egg being used to provide job opportunities in infrastructure and property projects, outweigh the potential for conflicts of interest. This is particularly so in view of the many non-unionists now involved by governmental default mechanisms and other means in union-dominated super funds. And in view of the CFMEU’s past record of illegality, there always is the potential for ‘influencers’ to discourage rival developers from seeking participation in a project a union super fund has in its eyes on.

But there is no point holding your breath waiting for APRA to fix this problem. Under the heading ‘Why APRA will struggle with valuations of unlisted assets’, the AFR’s Karen Maley lamented: ‘Australia’s prudential regulator faces a steep learning curve in attempting to decipher the myriad – and often questionable – techniques that are used for valuing the hundreds of billions of dollars’ worth of unlisted assets owned by the country’s superannuation funds… and to force super funds to adopt more realistic assumptions’. According to APRA’s new head, John Lonsdale, APRA’s current intention to look much more closely at how super funds go about valuing their sizeable investments in unlisted assets follows its 2021 review which concluded that few super funds had robust frameworks for revaluing unlisted assets, there was limited board engagement in the process, and some funds were relying too heavily on external parties, such as fund managers and asset consultants.

But maybe there is a simple reason why union super funds are reluctant to revalue their unlisted assets down even when their listed equivalents’ market prices have fallen. Maley quotes industry insiders pointing out that because fund managers’ remuneration is often linked to how well the fund performs, ‘this could encourage them to resist cutting the valuations of the unlisted assets held in the fund’.

Oh well, that’s it then.