The total operating reserves maintained by 65 multi-employer funds have increased 37.5 per cent over the last two years to $1.2 billion, according to research conducted by Deloitte Actuaries & Consultants.
The research, carried out by Deloitte partners Wayne Walker and Stephen Huppert, found this is the first time the total reserves for the 65 funds analysed have exceeded $1 billion.
Deloitte’s finding is particularly relevant because the Federal Government has proposed a risk-based operational risk reserve as part of the Stronger Super reforms, according to Walker. The establishment of the reserves has been backed by the Australian Prudential Regulation Authority (APRA), the Association of Superannuation Funds of Australia and the Australian Institute of Superannuation Trustees, he added.
“There is a lot that can go wrong in a superannuation fund,” Walker explained. “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.”
Fraud, along with problems with third-party providers, can also eat into reserves, Walker said.
The Deloitte research also found that very few companies have undertaken quantitative risk assessment as a basis for setting reserves. Some trustees set a target within a broad range recommended by APRA, while other funds’ reserves fluctuate based on net fund income.
“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.”
But if things go wrong, funds tend to offset their risk through recourse to 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 Deloitte research also found that the top 10 funds by membership had reserves that totalled $742 million. Walker said that although this was less than 5 per cent of total assets, it gave larger funds a competitive advantage over their smaller counterparts.
