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

(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.”