AUSTRALIA - Industry superannuation funds are holding A$1.2bn (US$1.2bn) in operating and general reserves, research by Deloitte has found.
It is the first time that total reserves, held to compensate members in the event of operational errors such as miscalculations of unit prices or taxation, have exceeded A$1bn.
Until now, reserves have not been mandatory, but that would change under the government's Stronger Super legislative policy reforming superannuation policies.
"Total reserves have increased by 37.5%.over the last two years," said Stephen Huppert, a partner with Deloitte
Actuaries and Consultants.
"This growth is testament to the significant resilience of industry funds' to deal with the global financial crisis and its impact on member behaviour and the subsequent and ongoing changes to the legislative environment."
Although the total amount of operational reserves has increased, there is wide disparity in the amount and percentage reserved by individual superannuation funds analysed by Deloitte. Six of the funds had no reserves at all, while a further 12 had reserves of less than A$1m. Combined, those 18 funds have almost 500,000 accounts and more than A$6.8bn in fund assets.
"In our view they are exposed, as they might find themselves in the position of needing to reduce returns to members in order to meet the cost arising from dealing with an operational risk event," Huppert said.
The ten largest funds by membership, with 8.6 million accounts and A$155bn in assets have reserves totalling A$742m, Huppert and co-author Wayne Walker said.
"Although less than 0.5% of assets, it is a lot of money and constitutes a real competitive edge for the larger funds over their smaller counterparts," Walker said.
Not maintaining an operational reserve is poor risk management, Deloitte said. Often, funds which do not maintain reserves rely on contractual arrangements with service providers to provide restitution in the event of an operational error by outside providers.
"This is a dangerous practice," said Huppert. "It ignores many types of risk and is predicated on the assumption that there will be restitution from a willing and financially strong third party. That is risky, because it is not necessarily the case. Even if restitution is available it can sometimes take more than 12 months to settle and find its way to the fund."
Here are key takeaways from our 2019 Asset Allocation Outlook on how we are positioning asset allocation portfolios in light of our outlook for the global economy and markets.
This week's top stories included a Freedom of Information request revealing more than 100,000 savers could face six-figure tax bills as a result of GMP equalisation.
The Pearson Pension Plan has entered into a £500m pensioner buy-in with Legal & General (L&G) in the insurer's first deal of 2019.