Because superannuation funds typically don’t have any shareholders, the only pool of money available to trustees is members’ money, says principal of The Risk Board, Bruce Auty.
Mr Auty, who was the chief risk officer of the Bank of Queensland from 2004 to 2009, told InvestorDaily it can become very complicated for a super fund to accurately calculate members’ balances.
The way investments are allocated across a number of different streams within a super fund (high growth options, moderate growth options, and so on) can make it difficult to work out the return for a specific investment, he said.
“They’re genuine mistakes – no one makes them on purpose. But the only people who can pick it up are the members,” said Mr Auty.
Even with the Australian Prudential and Regulation Authority’s (APRA’s) new operational risk requirements, the reserve must be replenished periodically by members, Mr Auty said.
Audits of the fund often won’t pick up the problem because they tend to focus on the higher order functions of the fund rather than the details of member balances, he said.
It is difficult to say how often funds make mistakes with members’ balances, said Mr Auty.
“[Trustees] don’t play this stuff up too much. They tend to be a bit more discrete about it and write to members saying, ‘There’s been an adjustment to your balance’,” he said.
Often the mistake is only discovered two or three years after the event, which can make it hard for the fund to properly compensate the member, Mr Auty added.
“Past errors in unit pricing and crediting rates – it does not matter which – [may] have been discovered years after the relevant time, with the compounding effect, exits and entrances and tax treatment making remediation costly and complex,” he said.
To diagnose systemic issues causing mispricing, funds should consider a periodic external review, Mr Auty said.
“You could only do it on a sampling basis. But as long as your sampling was across various asset classes, you would tend to think these things [any systemic errors] would be picked up,” he said.
