Admin errors could leave funds insolvent without risk reserves

The inability to build and maintain a risk reserve would leave a superannuation fund insolvent from an administrative error, according to the Australian Prudential Regulation Authority (APRA).

In an opening statement to the House of Representatives Standing Committee on Economics, APRA executive member, Margaret Cole, said the costs to members from failing to hold a reserve would be “material”.

At the end of last year, several super funds applied to various State courts for direction regarding amending their trust deed to enable the charging of fees, with the view to building a financial contingency reserve on the trustee balance sheet.

Problems could occur without a risk reserve, APRA said, by administrative errors such as submitting data late.

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“To be clear as to the significance of this issue, without the ability to build and maintain a risk reserve an otherwise well run and well performing trustee could be rendered insolvent by a minor operational administrative error, such as submitting data one day late, resulting in a maximum penalty of $11,100.

“The disorderly failure of an otherwise sound and sustainable RSE [registrable superannuation entity] licensee would be likely to be severely detrimental to members as it would likely impose material costs and create significant operational risks.  

If the situation resulted in insolvency, APRA would be required to appoint an acting trustee to prevent an adverse impact on members and ensure stability of the fund.

“APRA expects the fee-setting principles to inform decisions around the setting, design and level of any fees and for consideration of these principles to be supported by appropriate documentary evidence.

“These are important principles that APRA will apply not just to RSE licensees who have sought court approval to amend their trust deeds, but to all RSE licensees across all manner of fees.”