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Russell advises on risk reserves
In the likely event that the Government makes it compulsory for not-for-profit super funds to maintain operational risk reserves, funds would need to build these reserves slowly and consider the best way to fund them.
These are the main outcomes from a Russell Investments paper, which found that while some funds maintain some form of reserves, these vary widely, both in their size and for the reasons they have been established.
The core reasons for maintaining such a reserve are to rectify issues that arise from incidents including unit pricing or crediting rate errors, or errors with member records or administration.
“The point is to be able to rectify these issues without having to go into member accounts,” said senior consultant actuarial and benefits consulting at Russell Investments, Fintan Thornton.
If member benefits were paid incorrectly across a whole industry fund you would want to fix that in a short timeframe without further disadvantaging the member and compounding the issue, he said.
The allocation to an operational risk reserve would likely vary, depending on factors such as the size of the fund and the proportion of administration costs that were internal and outsourced, he said.
In examples quoted in the paper, that allocation varied from 0.6 per cent of total funds for a $1 billion fund with largely outsourced expenses, to 0.3 per cent of assets for a $10 billion fund with mostly insourced operations.
The main question is how the operational reserve would be built in the first place, Thornton said.
The funds would need to be built up over a long period of time, and could be offset by a reduction in investment earnings tax from the Government but would likely be largely funded by members, he said. In this case they could be developed through a reduction in member earnings, he said.
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