The country’s largest funds have been banking capital reserves in the 100s of millions of dollars and many are continuing to increase these reserves well above the amount required by the regulator, a consulting firm’s preliminary analysis has shown.

Some of the country’s largest funds have substantive multiples of their operational risk financial reserve (ORFR) set by the Australian Prudential Regulatory Authority (APRA) at 25 basis points.

Of the top 25 funds [ranked by assets under management] three funds have more than 200 basis points in reserves including the mandated regulatory amount, four funds have more than 100 basis points in total and 10 funds have double or 50 basis points in total reserves, the analysis showed.

While some funds have attached reserve accrual to areas including investments, administration insurance, fund development and the like, a handful of funds including QSuper, Sun Super, Cbus and IOOF have accrued general reserves materially above the regulated risk reserve amount, publicly available information has shown.

“It’s prudent to provision for the unexpected and it’s reasonable to expect that from time to time things may go wrong and that remediation activity might have costs associated,” said David Bardsley (pictured), KPMG Australia’s operations advisory partner, who shared his findings with Investment Magazine.

The KPMG preliminary analysis is based on publicly available data collected during the 2019/20 financial year sourced from APRA fund level superannuation statistics cross referenced with individual fund financial statements.

“Provisioning and setting aside reserves in the event things do go wrong is good business and members and shareholders alike in industry and retail funds respectively should expect this,” he said.

The focus on fund risk reserves has increased in light of new civil actions brought against profit for member funds in recent months where lack of access to balance sheet means members account balances are at risk of erosion in cases where potential penalties and remediation arise.

Conversations about risk reserves and general financial reserve accrual are getting more frequent among fund executives and is a prominent consideration in merger discussions, people who advise funds have said during a series of background interviews on the topic.

Whether funds can use general or other reserves to pay penalties or remediation is not clear and may need to be tested next year when super trustees will be prevented from using member funds to pay penalties for a breach of the Corporations Act or other commonwealth law from January 1, 2022.

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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