Thought long forgotten from the days of crediting rates, the practice of reserving is back among Australian super funds, according to a survey by Mercer.
The survey, of 28 not-for-profit funds, showed that one-third of those with reserves had accessed that portion of the fund in the past 12 months, mostly for operational risk reasons. A total of 21 funds had already established operational risk reserves.
The idea of having operational risk reserves is recommended in the Cooper Review, but is not yet a part of APRA requirements. Operational risk reserves are distinct from capital reserves, which will also possibly become compulsory after the Government deliberates on the Cooper report.
David Knox, senior partner in Mercer’s retirement, risk and finance practice, said the widespread uptake of operational risk reserves highlighted the advantage of the practice and bode well for seeing the Cooper Review’s recommendation being accepted.
“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,” he said.
“However, it is important to stress that there is no ‘one size fits all’ approach as to how big a reserve should be or how it is built. While it makes sense to have a minimum and maximum range for reserve levels, the fund should be given flexibility according to its size, insurance arrangements and actual operations. This will ensure reserves are established in a way that makes sense for the fund and its members.”
Capital and risk reserves serve different purposes. Minimum capital requirements exist, which may be introduced, will be to ensure the organisation remains solvent. Knox said: “Unlike operational risk reserves, capital cannot and should not be relied upon for a ‘rainy day’ – that’s what operational risk reserves are for, to ensure there are immediate funds available to compensate members if required.”