Big funds take back-office functions in-house

As regulatory change and a competitive market fuel the need for greater consolidation in the superannuation industry, having greater scale brings both opportunity and challenges to super funds.

That was the conclusion of a panel discussion on the effects of scale on the ability of a fund to achieve optimal operational efficiency; and how in-house operational models and outsourcing needed to be fundamentally reassessed, particularly at a custodial level.

Speaking at the Investment Administration Conference, AustralianSuper senior investment manager Peter Curtis said that around five years ago the fund had been concerned with the delivery timeframes from custodians, and how efficiently information was delivered.

Since that time, the focus has been on how the fund will grow and what services and administration capabilities will need to be put in place to meet those changes.

There is a lot more effort being spent on planning and developing middle- to back-office capabilities to cope with the growth of funds under management (which sits at around $43 billion at AustralianSuper), Curtis said.

"We've moved our model away from always using advisers for a whole range of things, to looking for expertise that we need and bringing it inhouse - we find that is a cheaper model for us because it allows us to bring what's normally a variable cost to a fixed cost," he said.

In regards to mergers and acquisitions, Curtis added that it was important to have a dedicated inhouse operations team, as well as a strong relationship with a custodian, in order to achieve the best outcomes for members.

"We know we can go from getting an in-principle agreement to a merger or large corporate roll-in and have the assets across in five to six months," he said.

Super funds abroad have more capability than the Australian market when it comes to risk management and due diligence, Curtis added.

It was important to develop this as an in-house capacity as the Australian superannuation industry continued to grow, he added.

"Generally, I think it's been a total outsource model, and as you get to a certain size you start to see that that leaves a number of operational gaps and exposes the fund to much larger risks than they should be running," he said.

For BUSS(Q) compliance and operations manager Linda Vickers, leveraging the scale of larger superannuation funds is paramount to operational efficiency - particularly in the area of administration and information technology processes.

J.P. Morgan Worldwide Securities Services Australian and New Zealand head of client relationship management, superannuation funds Chris Field, agrees.

He said that there were advantages for funds to be associated with 'like' communities and to learn from the experiences of the larger funds.

"Many super funds are not flush with human resources, and they are very stretched across a number of functions within the organisation, so that reliance on outsourcing partnerships [with the custodian] will continue as smaller funds grow in wealth," Field said.