Australian superannuation funds have grown substantially since 1992 due to the gradual rise in contribution percentages and the reinvestment of returns. Funds are expected to continue to grow until 2035 at least before they stabilize at around A$9 trillion ($5.9tn). This growth is expected to propel Australian superannuation FUM to second place globally behind the US, according to a recent paper by the International Swaps and Derivatives Association (ISDA).
Funds regulated by the Australian Prudential Regulation Authority (APRA) represent the largest component of the Australian superannuation sector. These funds have significant and growing investments in offshore assets but need to provide returns in AUD for members. About half of non-AUD exposures are managed with derivatives, such as FX forwards and cross-currency swaps.
The size and complexity of derivatives portfolios are expected to increase in line with rising FUM and offshore investments. As a result, derivatives exposures must be managed and reported appropriately to maximize the returns for fund members. The APRA and Australian Securities and Investments Commission (ASIC) regulatory frameworks relevant to funds are also evolving. This introduces an expanding range of compliance risks that need to be closely monitored and managed.
“Superannuation funds must adapt through enhanced governance, compliance and operational strategies that address their increased use of derivatives. Use of established technologies and standards can also improve efficiency and reduce operational and regulatory risks,” ISDA wrote.