Download Liquidity Management Policy Summary

Cbus
Policy
Cbus Liquidity
Management
Plan Summary
1. Purpose and objectives
of the policy
3. Governing legislation and
regulatory requirements
This document outlines the key
elements of the United Super Pty Ltd
(the Trustee) Liquidity Management
Plan (the Plan) for the Construction and
Building Unions Superannuation Fund
(the Fund; Cbus).
The key elements of the legislative
requirements are contained within:
■■
Superannuation Industry
(Supervision) Act 1993 (the SIS Act)
■■
Liquidity refers to the availability of
Fund assets to meet its commitments.
These assets include cash and other
assets that can be converted to cash
within 30 days, without a significant
adverse impact on their value.
Prudential Standard SPS 530 –
Investment Governance
4. Definition of an illiquid
investment and liquidity risk
The Plan is designed to ensure that
there are sufficient funds available
to meet payments, transfers and
withdrawals for Cbus’ members, while
retaining member equity.
The purpose of the Plan is to describe
the Trustee’s understanding and
definition of liquidity and liquidity risk
in the context of the Fund, including
setting out the principles and strategies
the Trustee considers when managing
liquidity risk in both normal and
stressed liquidity environments.
2. Responsibilities and
accountability
Note that this is a summary
of the policy.
Date of this Policy:
April 2016
Cbus’ Trustee: United Super Pty Ltd
ABN 46 006 261 623 AFSL 233792
Cbus ABN 75 493 363 262
MySuper authorisation
75 493 363 262 473
05/16
The Trustee is at all times responsible
for the Fund’s investments, including
establishing, reviewing and giving effect
to an investment strategy for each
investment option that has regard to
the liquidity of the investments covered
in the strategy and the expected future
cash flow requirements.
The Trustee believes that it is
appropriate for the Fund to take a long
term view when making investment
decisions and that by doing so it can
increase the probability of achieving its
investment objectives.
The liquidity of an investment is
generally considered to be a measure of
how quickly it can be converted to cash,
without negatively impacting its value.
Hence, the key factors that influence
liquidity levels in an investment relate to
its nature and characteristics, such as:
■■
The type of investment, e.g. equity,
bond, property;
■■
The structure of the investment,
e.g. direct holding, units in a trust,
pooled superannuation trust;
■■
The marketability of the asset;
■■
Whether the asset trades on listed
or private markets; and
■■
The size of the holding relative to
normal trading volumes.
An illiquid investment is an investment
that cannot be converted to cash
within, or reasonably close to, 30 days
or where conversion to cash over that
period, by itself, would have a significant
adverse impact on its realisable value.
Liquidity risk for the Fund is the risk
that the Fund is unable to meet its
financial obligation to beneficiaries as
they fall due, either at all or by selling
assets at materially discounted prices.
Liquidity
Policy Summary
page 2
5. Why invest in illiquid
assets
The Trustee believes that additional
returns can be achieved through
exposure to illiquid assets over the
long term. As a long term investor, the
Trustee believes it has an advantage
over other investors that may have
a shorter time horizon and that by
investing in illiquid assets the Fund can
benefit from an illiquidity premium (the
additional return that can be obtained
by investing in an illiquid asset).
In addition to the illiquidity premium,
exposure to illiquid assets can also
provide the Fund with diversification
benefits and a reduction in volatility,
due to different exposures to risk
factors and the appraisal based
valuations of unlisted assets.
However, the Trustee recognises that
the Fund needs a degree of liquidity
in each option in order to meet its
ongoing obligations to beneficiaries and
to ensure appropriate risk management
and equity between transacting and
non-transacting members.
As such, the Trustee explicitly considers
liquidity issues when setting the
strategic asset allocations and target
portfolios of each of the options
offered to members.
7. Liquidity risk control
framework, monitoring and
reporting
Trustee aims to further develop over
time its systems and processes to
identify lead indicators of increased
likelihood of Liquidity Events.
The Trustee’s Risk Register sets out
the control framework for managing
liquidity risk.
9. Liquidity events
Overall, the Trustee is willing to accept
a Moderate level of residual risk
with respect to liquidity risk and has
identified a number of risk indicators,
aligned to its appetite, for various levels
of illiquidity in the Fund.
The Trustee has established a liquidity
monitoring framework to routinely
monitor a range of key lead indicators
of liquidity risk. If the monitoring
framework identifies a significant, or
potentially significant, liquidity issue
it must be raised with the Investment
Committee Chairman as soon as
practicable.
8. Liquidity management
In summary, the Trustee’s approach to
managing liquidity risk involves:
■■
■■
6. Liquidity profile of
investments
■■
The Fund manages most of its
investments via a pooled arrangement
in which the underlying assets from
each diversified option are invested
collectively across the various asset
classes. The allocation to these asset
classes within each option is the
main determinant of the overall risk
and return characteristics, including
an option’s liquidity profile. Hence,
the Trustee first aims to understand
the liquidity characteristics of each
asset class before developing target
exposures for the individual options.
■■
Explicitly considering liquidity
when setting and reviewing asset
allocations for each option;
Monitoring key indicators of
changes in net cash flow and/or
investment markets;
Regularly testing liquidity in the
Fund over a range of stressed
scenarios; and
Maintaining a Liquidity Action Plan
for managing liquidity crisis events.
Whilst the Trustee has a Liquidity
Action Plan to help guide its response
to a full blown Liquidity Event, the
Trustee’s strong preference is to avoid
a Liquidity Event by identifying and
responding to lead indicators that
liquidity risk is building before a crisis
eventuates. The Trustee has in place
a comprehensive liquidity monitoring
system, which is designed to identify
such signs and allow the Fund to react
before the liquidity crisis occurs.
Identifying potential risks in advance is
an area of focus for the Trustee. While
it is not always possible, proactively
avoiding risk is preferred to reacting
after it materialises. As such, the
A Liquidity Event is a significant,
unexpected, increase in the exposure
to illiquid assets. The Trustee considers
a Liquidity Event to have occurred in
the Fund when the allocation to illiquid
assets in the Growth (Cbus MySuper)
option rises, or is reasonably expected
to rise, above 55 per cent.
10. Liquidity stress testing
At least every six months, the Fund
conducts a liquidity review that
includes stress testing the Growth
(Cbus MySuper) option to ensure the
level of liquidity risk remains within the
Trustee’s tolerance levels. The stress
testing involves assessing the impact
on liquidity from a series of shocks,
with each shock calibrated on the basis
of extreme movements in history.
The shocks to be considered include
(amongst other things):
■■
Sharp falls in equity markets;
■■
A material fall in the Australian
dollar;
■■
An increase in member switching
from the Growth option into cash;
■■
A significant reduction in net cash
flows into the Fund.
11. Liquidity action plan
The Fund has a Liquidity Action Plan
that it can put in place if liquidity risk is
deemed to be too high or if it reaches a
maximum threshold.
Generally there will be five phases to
any liquidity action plan:
■■
Identification and evaluation of a
potential liquidity crisis;
■■
Liquidity crisis escalation
procedures;
■■
Consideration of the
implementation of contingency
measures;
■■
Implementation of the response;
and
■■
Increased monitoring and reporting.