Investment governance frameworks must evolve as super funds grow

As the superannuation industry continues along its ‘megafunds’ pathway, funds will need to evolve with the growing need for flexible and adaptive governance arrangements for internal and external factors, according to KPMG.

KPMG projected that some super funds would grow by 200% to 300% by 2030 and that a small number of funds would be greater than $500 billion in five years’ time.

Speaking at Frontier’s annual conference, Platon Chris, director of actuarial and financial risk at KPMG, said: “The implications of such rapid and significant growth will require super funds to review and refine their investment arrangements and approach on a proactive basis to plan ahead for change”.

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According to Chris, super funds would need to focus on five key elements to manage the growth KPMG anticipated for the sector, starting with improving access to investment opportunities.

“This may include the enhancement of strategic partnerships with external parties and or building an internal capability, both locally and globally,” Chris said.

The second factor was the need for super funds to address mandate capacity constraints which typically challenged Australian equity mandates, according to Chris.

“For example, funds may choose to increase allocations to passive strategies, look at changing investment strategy be it a focus on the total portfolio approach, or look to internalise investment arrangements and management capability,” he said.

Funds must also enhance their internal capability, he said.

“Depending on the investment management approach superfunds that have greater reliance on outsource providers and managers will need to ensure they have a strong internal team to be able to scrutinise and challenge these providers to maximise outcome,” Chris said.

His fourth and fifth points were in relation to super funds realising economies of scale and reducing management costs.

He said super funds would need to implement strong investment governance frameworks which could include activities such as:

  • Regular internal and external reviews of investment arrangements;
  • Scrutiny of internal and external arrangements to ensure outcomes could be maximised and risks managed;
  • The development of strategic roadmaps and timeframes to assist with implementation of changes; and
  • The promotion of transparency within the organisation and external service providers to enhance decision making and oversight.

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