Australian superannuation funds are placing a growing emphasis on using a holistic approach to enterprise risk management (ERM).
The global financial crisis (GFC) highlighted failures in risk management across many financial services businesses as unnecessary and uneconomic risks were taken on.
However, Australian super funds handled the period generally well due to stringent ERM disciplines, Actuaries Institute chief executive Melinda Howes told InvestorDaily.
"What's been a new focus since 2008 is this holistic approach," Howes said.
"Bottom-up risk management has always been done very well in Australia but this new holistic, overarching ERM approach is the new piece of the puzzle."
While minimising losses in a financial sense would be the top benefit of implementing ERM, it is not just effectively controlling financial risks that are involved, Howes said.
"It's also operational risk and strategic risk so it becomes quite holistic," she said.
"The super funds will usually start off in saying they're interested in doing work on liquidity or on its demographics but then they start to see how interlinked all of this."
Recent developments in regulation require super funds to make ERM a key priority, Howes said.
"We've got the new prudential standards for super funds where they've got to have a risk management framework and the board has to sign off on it so there's a real focus on that," she said.
"Operation risk is an issue that APRA are now looking at - making super funds hold reserves for operational risk so that's quite new and actuaries are working with funds to see how much to hold there."
Howes said actuaries have been managing risks in defined benefit super funds for 100 years but they have discovered that those disciplines are applicable in defined contribution super funds as well.
"Analysing the demographics of the fund so at what point will the defined contribution super fund tip from net inflow to net outflow as their members start to retire?
"There are obviously issues around liquidity, particularly as members now having so much flexibility of switching their money from one investment to another, so what do you do if you have illiquid assets but all your members decide to switch to your cash portfolio?"
She said super funds are becoming more sophisticated in ERM and acknowledging the need to future-proof itself.
