Op Risk for Super Funds

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Presentation to Deloitte Super Update Breakfast Session

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Op Risk for Super Funds

  1. 1. Super update 9 August 2011Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  2. 2. Operational Risk ReservesCurrent state and what is comingStephen HuppertPartner, Actuaries & Consultants Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  3. 3. Current capital requirementsSIS requires that the custodian of a superannuation fund (other than an SMSF)must be a body corporate with at least $5 million in Net Tangible Assets (NTA)and/or an approved guarantee How funds meet capital requirements As reported by the Cooper Review Method of meeting Capital Requirements Extended Aggregate Public Offer Public Offer Total $5M net tangible assets in own right 6 37 37 $5M approved guarantee 3 6 9 Custodian 8 55 63 Invested in prudentially supervised institution 0 2 2 Total 17 94 111 Source: Super System Review Final Report Super Update - 9 August 2011 3
  4. 4. Current regulatory frameworkIf a reserve is maintained, the SIS Act requires trustees to formulate andgive effect to a strategy for its prudential management.Trustees must also consider a range of issues, including the: • intergenerational equity of the reserve, which will typically act to spread costs across different ‘generations’ of fund members; • appropriate levels or range of the reserve; • controls and procedures for managing the reserve; and • the manner of distribution if the reserve is no longer required, typically in the event of fund wind-up or merger. Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  5. 5. Operational Risk Reserve The Basel Committee on Banking Supervision defines operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. The Cooper Review defined an operational risk reserve as part of the asset base of a superannuation fund aggregated and held for the specific purpose of providing financial resources to allow the trustee to mitigate operational risks, such as unit pricing errors, where costs are not met by third parties. Super Update - 9 August 2011
  6. 6. Proposed capital requirements Super Update - 9 August 2011
  7. 7. Proposed capital requirements Super Update - 9 August 2011
  8. 8. Stronger super issues paper on operational risk requirements• Issue 1 – Trustee capital or an operational risk reserve – Question 1.1 In maintaining a financial buffer against operational risk losses, what are the advantages and disadvantages of holding resources in the form of trustee capital or an operational risk reserve? – Question 1.2 In what way, if any, should the rules relating to SAFs differ from those for other types of funds? – Question 1.3 To what extent should arrangements involving guarantees, custodians or holding assets in a prudentially regulated entity assist in meeting an operational risk resource requirement, and why?• Issue 2 – Minimum and maximum levels – Question 2.1 What are the advantages and disadvantages of setting a minimum dollar figure for an operational risk reserve or trustee capital requirement? – Question 2.2 What are the advantages and disadvantages of setting a ceiling on any operational risk reserve or trustee capital requirement?• Issue 3 – Implementation arrangements – Question 3.1 What issues would be involved in building up an operational risk reserve or trustee capital requirement? – Question 3.2 What transition period would be appropriate? Why? – Question 3.3 Are there any factors which the transition arrangements should address? Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  9. 9. What is the current position in the industry? • What level of reserves are currently being held? • Is there any relationship between the level of reserves being held and… – size of fund – number of members – operating expenses? Super Update - 9 August 2011
  10. 10. What we found… Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  11. 11. What we didn’t find…• As reported in the Australian Financial Review last WednesdaySuper Update - 9 November 2010 August 2011
  12. 12. The results: reserves as a percentage of assets 2010 reserves as % assets (increasing asset size)1.5%1.0%0.5%0.0% Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  13. 13. The results: reserves per member 2010 reserves/membership (increasing membership) 500 450 400 350 $ Per member 300 250 200 150 100 50 0 Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  14. 14. The results: reserves as a percentage of operating expenses 2010 reserves as % operating expense (increasing expenses)200%180%160%140%120%100% 80% 60% 40% 20% 0% Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  15. 15. Conclusions from our research• Range of approaches leading to a range of outcomes• Some funds use percentage of funds under management• Others more sophisticated approaches• Lack of consistency regarding disclosure• Approach should consider a range of factors including, in no particular order: – Level of in-house operations – Quality of controls and risk management procedures – Insurance arrangements – Risk management culture – Size of fund Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  16. 16. What is happening in other parts of the financial servicesindustry around the globe? Key findings • Progress has been made by many institutions in implementing operational risk management methodologies. • 47% of respondents consider their institution to be very effective at managing operational risk • There is increased attention to the importance of managing tail risk from events that are rare, but potentially catastrophic. • An area likely to receive heightened attention is how to incorporate risk management considerations into performance goals and incentive compensation decisions. Super Update - 9 August 2011
  17. 17. Super Update - 9 August 2011
  18. 18. Next steps… Super Update - 9 August 2011 © 2011 Deloitte Touche Tohmatsu
  19. 19. Super Update - 9 August 2011
  20. 20. Another way of looking at this A loss distribution curve • Operational risk management is concerned with the unexpected losses Super Update - 9 August 2011
  21. 21. Operational Risk identification and assessment Tools and methods for Tools and methods for identification assessment• Expert interviews • Magnitude of loss x frequency of• Self-assessment, questionnaire occurrence• Brainstorming • Definition of threshold values• Scenario analysis • Scenario analysis• Error analysis in existing • Value-at-risk processes • Key risk indicator/key• SWOT analysis performance indicator• Event analysis • ABC analysis• Risk identification matrix • Scoring models• Cause-effect diagram • Sensitivity analysis • Fault tree analysis Super Update - 9 August 2011
  22. 22. Not if but how…What are you currently doing to manageand reserve for operational risk? Super Update - 9 August 2011

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