Ope r ational R isk in Supe r annuation An accident waiting to happen? Presented by Peter Beck, CEO, Pillar Administration
Background • As at 30 June 08 there was $ 770bn invested in super funds (other than SMSFs) in Australia • Of these $198bn are in industry funds • Many of these industry funds use outsourced administrators such as Pillar Administration • Administration is a low margin business
Background (cont.) • Administrators do not have or are not required to have capital to cover operational risk • Administrators do not charge or reserve for operational risk • Administrators do have liability insurance to partially cover operational risk
Risk Management • Super funds are regulated by APRA • Funds are required to have effective Risk Management strategies and plans in place • Trustees can require outsourced providers to have risk management plans that align with their own • Responsibility for operational risk reserves is unclear – is it the Trustee, the administrator or a bit of both, or are they required at all?
Types of risk • Trustees bear investment risk • Administrators bear one-off individual processing risks eg minor errors • Administrators do not have the capacity to bear systemic operational risk such as unit pricing risk
Level of Administrators exposure • Is it the value of funds under management $198 bn? • Or the level of contributions and benefit payments processed? • Or level of insurance cover? Variable • Or is it the increase in unit prices processed • Or level of fees received? < $1 per member per week • Or profit margin 10c per member per week
Risk Reserves • APRA’s position is unclear – should operational risk reserves be carried and by whom? • Administrators fees are not sufficient to allow provision for systemic operational risk reserves • Administrators capital base is insufficient to cover systemic operational risk • Liability insurance is used to partially cover losses • A pay as you go system which currently exists versus a system of building and holding operational risk reserves leads to generational inequities
Where to from here? • APRA should regulate all superannuation administrators • Super administrators should carry sufficient operational risk reserves if they take on operational risk • Funds should carry sufficient operational risk reserves if they retain operational risk
Where to from here? (cont.) • Institute should develop prudential standards for operational risk for super funds • Institute should collect data to refine these prudential standards • OR • Let’s wait until we have a Super “HIH” and then we can get started!!!
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