The $6.4b not invested by super funds on behalf of members

Australian superannuation have been obliged to set aside around $6.4 billion which might have been invested for members but is being used to cover their Operational Risk Financial Requirements (ORFR).

Superannuation funds are citing the $6.4 billion ORFR figure whilst arguing that a better balance needs to be found between generating returns to fund members and meeting regulatory obligations.

In a submission to the Australian Prudential Regulation Authority’s (APRA’s) consultation on strengthening superannuation operational risk financial requirements, the Association of Superannuation Funds of Australia (ASFA) has bluntly stated that holding excess funds in the ORFR “results in worse financial outcomes for members”.

“As at December 2023 APRA regulated funds totalled $2,566 billion in Funds Under Management (FUM). On the basis that RSEs generally hold 25 bps to meet their Operational Risk Financial Requirements (ORFR), ASFA has estimated that an amount of $6.4 billion has been set aside for ORFR,” the submission said.

“This represents a significant amount of money that is not being invested to produce a return for members. Given this, it is imperative that the right balance is struck between competing public policy interests – adequately provisioning to mitigate operational risk should not be at the expense of member outcomes.”

The ASFA response is arguing that rather than imposing a one size fits all per centage of FUM for ORFR purposes, superannuation funds should be able adopt an approach having regard to their risk profiles.

“One potential approach that could be adopted is that an RSE licensee could either:

• adopt an ORFR target amount of 25 bps, in which case the requirement for the trustee to review the target amount annually would be removed; or
• determine that a different ORFR target amount for their RSE is appropriate, provided that it meets certain conditions, in which case, if the ORFR amount is less than 25 bp, an annual review of the ORFR target amount would be required.