Geoff Hodge, Milestone Group

Superannuation funds globally are moving towards full control and oversight of their externally-managed assets by tracking unit price changes in real time amidst increased regulatory scrutiny.

Speaking at Investment Magazine’s Investment Operations Conference last week, Geoff Hodge, Milestone Group’s US president, said that greater oversight of outsourced operations was primarily driven by European and US regulators.

“The role and expectations of oversight as a key control function to monitor and ensure the accuracy of NAV’s released to the market has gained significant attention and momentum in recent years, both in terms of adoption and sophistication,” he said.

Hodge said regulators in the northern hemisphere had altered their view on oversight resilience. Initially, they viewed the oversight of outsourced administration operations as a disaster recovery or business continuity issue. He added that pension funds were driven as much by reputation risk and loss of financial confidence as regulation.

“No one benefits if a pricing error is out in the market,” he said. “Consistency of oversight is critical yet while promoted by the regulators around the world, this is not discussed in Australia.”

Milestone’s latest Outsourcing and Oversight Report revealed that all 44 asset owners in the survey that are from North America and Europe were now carrying out some form of oversight of outsourced investment operations. This was up from 65 per cent five years ago.

The research revealed that the focus on accurate and timely contingent NAV capabilities was underpinned by regulators and trustee boards and would only increase with more regulatory oversight over the next three to five years. 

That said, 87 per cent of respondents pointed to avoidance of reputational damage as the primary driver for oversight.

Strikingly, a significant gap exists between the almost unanimous desire for independence of the oversight function and the reality, with 73 per cent of funds currently relying on service provider tools and portals, the analysis found.

The survey also showed that a majority of funds had difficulty when it came to the consistency of oversight across multiple providers.

Interestingly, the analysis found that while there was a high level of acceptance that automation is integral to achieving efficient and timely oversight, manual spreadsheets were still used as part of the oversight function by around half of respondents.

“It’s clear the industry is becoming aware of the nuances relating to operational risks that modern oversight and contingent NAV capabilities can mitigate, but there remains a way to go to for the industry to fully embrace resilient systems,” says Paul Roberts, chief executive of the Milestone Group.

“While there are relatively few headline-grabbing errors, practitioners know that outages happen more frequently than most realise. Many funds remain unprepared for a complete multi-day outage.”

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