Industry funds operational reserves top $1billionDOWNLOAD
Tuesday, 2 August: Total operating and general reserves maintained by 65 multi-employer industry funds totalled $1.2 billion at 30 June 2010 according to Deloitte Actuaries & Consultants. The research by Deloitte partners Wayne Walker and Stephen Huppert reveals that this is the first time that total reserves for these funds have exceeded $1 billion.
Stephen Huppert said: “Total reserves have increased by 37.5%.over the last two years. This growth is testament to the significant resilience of industry funds’ to deal with the global financial crisis and its impact on member behaviour and the subsequent and ongoing changes to the legislative environment.”
But there is more to do. “As the funds prepare for the changes arising from the Stronger Super and FOFA reforms, they also need to gear up for the government’s proposed risk-based operational risk reserve,” Huppert said.
Wayne Walker pointed out that in its Stronger Super announcement the Government called for the establishment of Operational Risk reserves. This is supported by the regulator APRA, as well as the associations ASFA (Association of Superannuation Funds of Australia) and AIST (Australian Institute of Superannuation Trustees).
Walker explained: “There is a lot that can go wrong in a superannuation fund. There have been various cases where a fund has had to spend significant sums to correct errors. Estimating tax to quickly finalise returns exacerbates the potential risk for instance. And we know that unit pricing and crediting rate calculations are complex and error prone.”
Walker pointed out that managing insurance arrangements has also been a cause of claim for some funds, and that superannuation administration remains bedevilled by data and systems issues that can percolate through to errors, omissions and substantial claims.
“Fraud and problems with third party providers can also give rise to financial cost and a call on accumulated reserves,” Walker said.
Determining the levels of reserves
The work undertaken by Deloitte Actuaries & Consultants suggests that only a small number of funds - generally the larger - have undertaken any quantitative assessment of risk as the basis for setting reserves.
In some cases Trustees set a target, typically within the broad range cited by APRA. In others, reserves grow or shrink erratically from year to year according to whether net fund income is positive or negative.
“The role of the reserves is entwined with the sustainability of member fees,” explained Huppert. “Many trustee boards rely heavily on contractual arrangements with service providers including administrators and custodians.” If things go wrong the fund more often than not will offset their risk through recourse to these third parties.
“This is a dangerous practice,” said Huppert. “It ignores many types of risk and is predicated on the assumption that there will be restitution from a willing and financially strong third party. That is risky, because it is not necessarily the case. Even if restitution is available it can sometimes take more than 12 months to settle and find its way to the fund.”
Wayne Walker agreed: “Risk management is possibly the single most important operational issue for superannuation trustees. It demands an understanding of major risks and how they may impact on a fund across a range of possible future circumstances. It also reflects matters within and beyond the trustee’s own control.
“The level of reserve held needs to be a balance; a culmination of understanding and analysis. It is very much fund specific,” Walker said.
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