Ope r ational R isk in Supe r annuation An accident waiting to - - PowerPoint PPT Presentation

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
• utsourced 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

• perational risk
• Administrators do not charge or

reserve for operational risk

• Administrators do have liability

insurance to partially cover

• perational 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

• perational 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
• perational 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!!!