Super funds grapple with short-term focus

Superannuation funds like their peers in the banking sector are also confronting remuneration issues - particularly short-term bonuses – which has merged as an area that needs to be monitored, according to an academic report into the sector.

An interim report from Macquarie University surveyed four large superannuation funds including the not-for-profit sector.

The report, Risk management maturity in large superannuation funds, coincides with the fifth anniversary of the implementation of prudential standards for risk management in July 2013 in the superannuation sector.

This APRA requirement ensures that risk management is a board responsibility and highlights the importance of risk culture in supporting good risk management outcomes.  

With the sector now worth $2.3 trillion in assets under management, “It was a good time to do an evaluation on the sector on how things are ticking,” the report’s co-author and Associate Professor at Macquarie University Applied Finance Centre, Elizabeth Sheedy said.

The report highlighted key areas of concern around remuneration and accountability.

“From our research we found that it was surprisingly common for staff to be eligible for short-term incentives. I was not previously aware about how prevalent these types of bonuses were in superannuation funds including the not-for-profit sector,” Sheedy said.

According to the Macquarie University’s academic, such remuneration structures could create a short-term focus in an environment which needs to have a long-term view.

“This could cause employees to cut corners. It’s something that superannuation funds need to be mindful of.”

She added that it could be a “potential problem that needs to be monitored closely”.

“The experiences in the banking sector have proven how things can turn out when such remuneration practices are in place.”

A risk culture

While the banking royal commission revealed a litany of scandals in in the financial planning businesses of banks, driven by a sales and bonus culture, Sheedy would not comment on what the inquiry’s hearings would hold for superannuation funds – which is slated for later this month.

Given that she “has not got any special insights into the inquiry, her focus remains solely on risk management in the sector outside the realm of the public inquiry.  

Macquarie University’s report did find that all four funds had made significant progress in implementing a risk culture and were actually ahead of the large Australian banks in areas around risk management being valued within the organisation and being proactive with identifying risk issues.

However, the results were based on similar research with the banks three years ago and Sheedy acknowledges that you “can’t really compare apples with apples”.

Superannuation funds like their peers in the broader financial services sector are also grappling with accountability around risk management.

Here, Sheedy points to the ‘three lines of defence’ in risk management.  

Front line staff are the first line of defence – dealing with customers on an everyday basis, they are primarily responsible for risk management.

The second line of defence are risk and compliance specialists who take on a more advisory role.

And finally the third line of defence is internal audit.

However, the report found that front line staff were not aware of this primary responsibility. For example, the bulk of the staff surveyed said that risk specialists not the business function were responsible for risk management.  

“Staff in front line roles do not understand the full extent of the responsibility they have in supporting risk management of the organisation. I suspect it is a challenge for all institutions in financial services.

Skill shortage

“It seems to be an ongoing issue. Every staff member needs to take responsibility for risk management. It clearly is not happening to the extent it should.”

Shortage of risk professionals was also identified as another issue for the superannuation sector.

“The issue is that risk management is still young in the superannuation sector. Many come from compliance backgrounds. It’s a different mindset. Risk management is about problem solving.”

Sheedy adds that this lack of risk specialists points to broader challenges around board governance.

Under the APRA standards large superannuation funds are expected to have a board committee with a risk brief, although this is typically combined with audit and compliance.

“Funds will struggle to find trustee directors with suitable qualifications and experience in risk management. There are more than 20 large superannuation funds – each have a board of 10 representatives. That means the sector needs 200 directors with experience in risk management.”

While director training programs may be of some assistance, Sheedy said a two-day training course is no substitute for a lengthy executive career on the front lines of risk management.

“Superannuation funds are hugely important for all of us. If we get it wrong, the consequences could be devastating.”

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