Mercer Urges Insurance-Style Governance Tools to Brace Super Funds for Risk

There is a gap in risk management in super funds, which now rival insurance companies in size and complexity, according to consultancy group Mercer.

(September 28, 2010) — Mercer is calling for insurance-style governance tools to prepare Australia’s superannuation funds for increasing risks.

Darren Wickham, a Principal in Mercer’s Retirement, Risk and Finance business, said rapid change in the industry and growth in funds under management means that superannuation funds have become more complex and vulnerable to risk. “The financial crisis brought to light a number of dormant risk areas for superannuation funds,” Wickham said in a statement. “As well, the risk profile will continue to change particularly as the population ages and the industry approaches a new era of draw-down, where more members will be drawing down from their savings rather than accumulating.”

He added that recent growth in funds under management means many superannuation funds now rival mid-size insurance companies in size and complexity. However, unlike other areas of the financial services industry, the Australian Prudential Regulation Authority (APRA) does not require superannuation funds to prepare a financial condition report. Currently only a handful of superannuation funds use financial condition reports, which would provide funds with an assessment of financial strength, modeling of the fund’s sustainability, a thorough risk review and deep dive stress tests on key areas of risk, Mercer revealed.

“This represents a real gap in risk management, especially when you consider the $1.3 trillion of savings tied up in super that belongs to regular Australians. It’s time for a rethink of what makes for best practice in superannuation risk management.”

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

GIC Recoups Losses, Reveals Emerging Markets Outperform

The Government of Singapore Investment Corporation, manager of more than $100 billion of reserves, has released its annual report for the third year, revealing positive news: a recoup of most of the losses made in 2008 as stock markets rebounded.

(September 28, 2010) — The Singapore state investment agency – the Government of Singapore Investment Corporation (GIC) – has recovered most of its losses caused by the 2008 financial crisis, and has said it will focus increasingly on emerging markets as they trump developed economies.

“…we expect high growth in the emerging economies to continue, with expanding domestic demand offsetting slower growth in export demand,” group chief investment officer Ng Kok Song said in GIC’s annual report.

Late Monday, the GIC, ranked as the world’s sixth-largest state investment company by Sovereign Wealth Fund Institute in California, revealed the average rate of return on its investments increased to 7.1% in US dollar terms in the year ending March, up from 5.7% the previous year. The fund revealed holdings in the US fell to 36% of its portfolio in the year ended March 31 from 38% the previous year.

“Global stock markets recovered strongly in 2009. This was a rebound from the devastation in the financial crisis of 2008,” according to the GIC’s report. “The increase in value of the government’s portfolio in the financial year to 31 March 2010 largely offset the loss in the previous year.”

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Unlike Temasek Holdings, the notoriously secretive fund failed to provide the value of its assets or how much they rose or fell.

According to the GIC, its holdings of developed market equities rose to 41% of its portfolio as of March 31 from 28% a year earlier. Investments in fixed income and cash fell to 24% from 32% as funds were used for the purchase of equities, while its allocation to alternative investments — including real estate, private equity, infrastructure and natural resources — fell to 25% from 30%.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742