APRA excludes paying penalty payments from super Risk Reserves

Superannuation funds will have to continue earmarking 25 basis points of their funds under management (FUM) to cover their Operational Risk Financial Requirement.

What is more, the Australian Prudential Regulation Authority (APRA) will make clear that they cannot use the ORFR to pay financial penalties.

Despite lobbying from some superannuation funds for a different approach including a membership-based measure, APRA has opted to stick with the 25 basis point requirement.

This means that funds such as AustralianSuper with over $300 billion in assets under management will need to provision $7.5 billion to meet its ORFR obligation.

In a letter to superannuation fund trustees and executives this week, APRA said that while it was proposing to adopt a simpler approach to operational risk management including allowing a wider range of uses of the ORFR it was not inclined to change the 25 basis point benchmark.

“APRA’s view is that, at this time, it is prudent to maintain the existing guideline target amount for the ORFR of 25 basis points of FUM,” it said. “This standard industry benchmark provides confidence that financial resources would be available to respond to a material operational risk incident if needed, minimising the risk that members are exposed to disruption and unplanned costs.”

Despite APRA opting not to move substantially on the 25 basis points benchmark, superannuation funds managed to convince the regulator to support expanding the uses to which they could put their Operational Risk Reserve.

The regulator said that its guidance would “remediation activities, costs associated with operational risk prevention, managing disruption, executing business continuity plans and supporting an orderly exit from a service provider agreement in response to an operational risk incident”.

However it also said the proposed enhanced guidance also proposes examples of where it would generally not be appropriate to use the ORFR, including business as usual costs including evolving frameworks, paying insurance premiums and the payment of financial penalties incurred by the RSE licensee.