AUSTRALIA - A growing number of superannuation funds are already well-placed to deal with the introduction of legislation concerning operational risk reserves, research by Mercer shows.
A survey by the firm found that out of 28 industry, public sector and corporate superannuation funds, 75% said they already had a reserve in place compared with just 56% in 2008.
The research follows the publication of the Final Report of the Super System Review - also known as the Cooper Review - which recommended that new capital requirements for super funds should be phased in over time (Global Pensions: 05 July, 2010).
The research also found that of the 21 funds with an operational risk reserve in place, a third had actually used it during 2009. The main reasons for deploying their reserve funds included: the failure of a service provider; a crediting rate error; a small unit pricing error; an overpaid member benefit; in order to address the gap between operating expenses and members' fees; adverse market conditions which led to reduced revenue.
The size of reserves held varied, but were typically between 0.3% and 0.8% of assets or liabilities, said the report.
Mercer said although the government has not formally responded to the Cooper Review's recommendations, the company believed all super funds should move towards establishing and developing an operational risk reserve.
Senior partner David Knox added: "Whatever the actual circumstances of a particular fund, one of the real advantages of an operational risk reserve is that the fund has immediate access to funds that can be used to compensate members detrimentally affected by an operational risk event.
"In due course, the fund may receive payments from an insurance policy or outsourced provider but the ability to inform members immediately that compensation will be available is an important feature that can protect the fund's reputation.
"The actual size of the operational risk reserve will vary between funds...[but] as a minimum we recommend that all funds should have an operational risk reserve equal to: 100% of the fund's annual in-house operating costs; 50% of the fund's annual outsourced administration costs; and 35% of the fund's annual outsourced investment costs - assuming a range of fund managers are used."
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