Home / News / Open fund reserves for upgrades: AIST

Open fund reserves for upgrades: AIST

News

The Australian Institute of Superannuation Trustees (AIST) has argued that funds should be permitted to use their operational risk financial reserve (ORFR) to upgrade their systems and prevent future risks earlier.

The ”blunt” 0.25 per cent of fund capital that funds must hold in their ORFR is now becoming a “very significant sum” for some of Australia’s larger funds, according to the AIST, and one that cannot contribute to member returns. The AIST argues that’s creating large reserves of non-productive capital that continues to grow for “no perceived benefit” when it could instead be opened up for other uses.  

“Industry competition, creation of mega funds, YFYS performance test are all driving fee compression across the industry,” the AIST said in its submission to APRA’s “Strengthening Financial Resilience in Superannuation” consultation. “This is positive for members but has the potential to effect fund sustainability in the future and/or could result in fee increases.”

“Many funds across the industry require significant investment in technology, operating platforms and systems to modernise and improve value proposition to their members. Currently, access to limited capital is restricting the process of innovation and transformation.”

The AIST notes that the quantum of capital held has no correlation to risk management, and that a prudently managed fund with “extensive resources” is required to hold the same amount as one that is run badly. It instead proposes that the ORFR amount be flexible, potentially through a dollar-based level calculated with a more detailed approach to quantifying operational risk.

“The purpose and allowable uses of reserves should also be considered,” the AIST said in its submission. “As funds in the ORFR can only be drawn upon to remediate a risk event loss that has already occurred, it cannot be used to mitigate the likelihood of potential future events.

“AIST believes there is opportunity to broaden the possible uses of those reserves to include other purposes connected to prudent risk management of the operations of the fund. For example, access to the ORFR to update/upgrade/modernise technology systems that could create risk if not undertaken, could see funds able to address future risk earlier, and therefore more cost effectively.”

The consultation comes amidst criticism of new reserves that some funds are building over and above the ORFR in order to avoid insolvency in the event of a substantial penalty. While some funds will slug members with a new fee, others are choosing to build the penalty reserve from existing administrative reserves – though a significant penalty could still see members charged more.




Print Article

Related
Why taming the inflation tiger will be harder than the 1970s

Inflation is making a latter day comeback, and a financial system “sanitized by 15 years of free money” is totally unprepared. It’s time, once again, for tough medicine. Inflation hasn’t been this high in 40 years, but investors have become convinced that central banks can still tamp it down it with relative ease – a…

Lachlan Maddock | 27th May 2022 | More
Bragg offers a super manifesto (from opposition)

One of the Coalition’s few surviving  “super soldiers”, Andrew Bragg has called on his party to go further down the route of “flexibilising” super – if not abolishing it completely. Senator Andrew Bragg finds himself in a curious position following Labor’s election win. He’s one of the few super partisans to survive the teal clean…

Lachlan Maddock | 27th May 2022 | More
Appen left at the altar. Market heads lower. Good week continues for US markets.

Appen left at the altar A bizarre blink-and-you-missed takeover approach came and seemingly went for one of the local market’s tech leaders Appen, which develops the datasets for machine learning and artificial intelligence. Canadian company Telus International sprang a $9.50 a share bid on the company, which said it would talk to Telus to try to…

Drew Meredith | 27th May 2022 | More
Popular
1
News and OneVue go live with brightday
Alec Law | 11th Jan 2015 | More
2
Perrignon off to HK with Credit Suisse
Alec Law | 22nd Dec 2013 | More
3
Sports betting as a new asset class
Alec Law | 3rd Jul 2016 | More
4
BlackRock ahead of consensus with bullish view
Alec Law | 14th Jan 2017 | More
5
Statewide seeds bespoke Apostle fund
Lachlan Maddock | 23rd Mar 2022 | More
6
UniSuper’s VC foray a sign of things to come
Lachlan Maddock | 25th Mar 2022 | More