Super funds baulk at operational risk reserving

Major superannuation funds have questioned why they should have to retain at least 0.25 per cent of their funds under management to meet Australian Prudential Regulation Authority (APRA) operational risk financial requirements (ORFR).

The concern of the major funds has been revealed in a submission from the Association of Superannuation Funds of Australia (ASFA) which told APRA that some of its member funds had expressed concern that the requirement results in a significant amount of money “effectively being quarantined”.

Further it said the “quarantined” money was in most instances going to be invested conservatively and was likely to be in addition to other reserves held within the fund such as administration or insurance reserves.

“Accordingly, they have questioned whether the ORFR, set at 25 basis points of FUM, is always in the best interests of members and noted that the amount of money set aside to meet the ORFR will continue to grow to such an extent that it may be difficult to justify the quantum involved,” the ASFA submission said.

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“In addition, some member funds have expressed the view that the permitted use of the ORFR, to remediate losses from members’ accounts, is too restrictive and that the use of the ORFR should extend to other remediation costs, such as the cost of professional/expert support which is usually required to investigate, report, advise on and resolve issues.

“The view was expressed that the industry will be keen to see whether anyone has made use of the provisioning, and in what circumstances, and that some guidance for the industry from APRA could be useful.”