A recent Mercer survey of superannuation funds has found a large number of them already establishing and drawing upon operational risk reserves as part of their day-to-day running.
While it is not currently a statutory requirement for Australian Prudential Regulatory Authority (APRA) regulated funds to have these types of reserves the possibility exists it soon will be if the government implements the Cooper review’s recommendations.
The research house study found 75 per cent of funds surveyed admitted they already had an operational risk reserve in place. This had increased from a proportion of 56 per cent that had established one of these reserves in 2008.
A total number of 28 super funds took part in the survey covering industry funds, the public sector and corporate superannuation with 21 funds having already set up and operational risk reserve and a further seven funds in this group having actually used the reserve last year.
“If the recommendation on operational risk reserve is adopted, the good news is it won’t be a quantum leap for many super funds, instead it is a continuation of good practice within the industry,” Mercer retirement, risk and finance director David Knox said.
“The fact that one third of funds accessed their reserve in a single year highlights the advantage of the practice. Operational risk events do occur but with a reserve in place the fund is able to continue to operate after the event and members aren’t penalised,” he said.
Knox emphasised the importance for there to be flexibility in creating these reserves as every fund was different and a one size fits all approach may end up being detrimental to a fund’s members.
According to Knox it was also important to distinguish between capital reserves and risk reserves as each is used for a different but distinct purpose, with capital reserves to be used for solvency requirements only.
