Superannuation funds must be able meet the risk appetites of their members by continually reviewing their risk systems to meet the current risk environment.
Risk is dynamic and so too is the risk appetite of members, so it is important for the super board to know whether it is operating in a risky or benign market, according to CheckRisk LLP chairman Nick Bullman.
"Risk actually generates more risk. It's very counter-intuitive because you have risk events that generate a chain of risk that expands beyond the initial risk factor," he said.
Based on an 82-year daily return history of the US stock market, a recent study by CheckRisk found that, on average, risk clusters over a duration of three-to-seven years.
"The key is to measure the rate of change – a lot of risk systems take what's happened in the past and project it forward.
"That's literally like driving down the motor way and looking in your rear view mirror," Bullman said.
Addressing the Association of Superannuation Funds of Australia (APRA) National Conference in Sydney, he said super funds tend to over-set their risk appetite and often neglect to consider that appetite can be forced on to members as a result of macro changes.
The risk net has to be thrown as wide as possible, and the risk culture in any super fund must come from top of the organisation down – from the chairman of the trustee board to the chief executive and to the very way the fund runs itself, he added.
"Risk understanding cannot be abrogated to the risk function of the organisation – one of the things the Australian Prudential and Regulation Authority is very concerned about is that people 'own' risk in the organisation," Bullman said.
TWU Super chairman David Galbally agreed with Bullman and added that while trustees need to have a strong relationship with their CEOs and advisers, the investment decisions of the fund lie in the hands of those running the fund.
"The over-reliance on a risk system means you stop thinking – I'm not saying value at risk is useless," Bullman said.
"What you have to do is to look at how quickly the value at risk number is changing and then make a quantitative decision on whether you're going to rely on that number or not."
