“Financial management in a super fund is not about trying to maximise a profit – it is about minimising costs, expenses and overheads,” says Nick Vamvakas, executive officer risk of Equip, on the old style model for a chief financial officer.
The role will always involve operational and compliance duties, but he sees the need for it to be updated.
Vamvakas, who was formerly chief financial officer and chief risk officer of ME Bank, says there is much more value that can be squeezed out of the responsibilities of a chief financial officer.
And for this reason, Equip have replaced the job title of chief financial officer with that of executive officer risk.
Now a year into the job, he adds a layer of responsibility by negotiating better outcomes around financial transactions and also providing an extra layer of risk analysis on the fund’s investments.
These are all tasks he describes with a passion. By contrast, he sees the job of checking the numbers each month as straightforward.
“I noticed over the first couple of months that the numbers were almost identical to budget and the variances were well known and anticipated well in advance. The cash flows are well known, so the finance aspect of the role is not as critical as it would be in a corporate with more volatile income and expenses.”
The main expenses of the $7 billion Melbourne based fund are investment management fees, insurance premiums paid to Hanover, custody fees and the costs of running the main office. About one fifth of the expenses are attributable to the trustee company.
His experience in financial markets has enabled the fund to seek better outcomes from a range of day-to-day transactions. For example on a recent quarterly payment to a US investment manager, the exchange rate achieved was 4 US cents better per Australian dollar.
“Many funds would either accept the retail rate or allow their custodian to undertake the transaction,” he says. “By using the wholesale rate in our case we could save up to $100,000 per year. I believe that the finance function can add significant amounts to the bottom line of members’ accounts by seeking these opportunities.”
In addition to the finance functions the role of executive officer risk is also accountable for compliance, operational risk and analyses the risk being taken on by the investment team headed by Michael Strachan. As such it is an extra pair of eyes, an independent opinion within the fund that reports directly to Danielle Press, chief executive of Equip and to the board, the audit committee, the investment committee and sits at the executive committee table.
Press is particularly keen for analysis on the sequencing and drawdown risk of the investments, says Vamvakas. From the lows of 2008/9 it took the fund 24 months to regain the value it lost at that time. Such estimates are regularly carried out across all portfolios on maximum and minimum risk thresholds that have been established by the investment committee.
He talks of his role as being the second of three lines of defence for investment risk, the first being the front office investment team and third being external audit. AustralianSuper has a similar role where Tony Brain acts as head of risk.
There are also opportunities and not just dangers to be derived from this risk analysis. “If we are sitting at eight per cent liquidity and our threshold is a maximum of 10 and a minimum of four,” he says. “I might say ‘Why are we sitting at eight? Are we running too much liquidity in this environment?”
Vamvakas believes that this function is merely falling in line with the future expectations of APRA regulations. “APRA significantly increased the requirements around liquidity and capital in the post GFC environment in the banking industry. They have a stated objective around harmonisation of standards where possible across financial markets,” he says from firsthand experience at ME Bank. “I could see where the bank was, was where super funds needed to get to.”
Insurance and superannuation currently sits outside the full impact of such rules, but he sees it as inevitable they will be included.
“You do not need too much liquidity in superannuation, but you do need scenario, stress testing, modelling and a robust liquidity management plan,” he says, adding, “APRA would want to see you living and breathing this to be able to manage the funds requirements in a range of circumstances and fast-changing financial environments.”