The Australian Prudential Regulation Authority (APRA) is soon to implement, Draft Prudential Standard SPS 231 Outsourcing, designed to improve the management of outsourcing risk in superannuation funds and harmonise such regulation with that of banks. Superannuation funds will receive more attention than banks in this regard, however, given the extent and prevalence of outsourcing to related parties in the superannuation industry and the resulting potential for increased risks.
The purpose of this paper is to examine the likely impact of the legislation given the nature of outsourcing relationships in Australian not-for-profit superannuation funds, in terms of three factors identified in the literature, that is relationship type, length of relationships, and monitoring costs. Responses to a survey of 26 superannuation funds are analysed to determine whether these factors have a bearing on the success, and consequently risk, of investment outsourcing with asset consultants, investment managers and custodians.
The study finds little evidence to support the relevance of these factors, although relationship type was found to be significantly related to success in funds’ relationships with their asset consultants. This may well be due to the complex shared decision-making involved in this function. The lack of significance found between success, and length of relationship and monitoring costs suggests that funds are managing their outsourcing relationships well, monitoring them effectively and terminating contracts when required. It might be expected, therefore, that the new prudential standard will have little impact on outsourcing in not-for-profit funds.
The paper is the outcome of a collaborative project between AIST and ACFS. The authors would like to thank Prof Kevin Davis of ACFS and Tom Garcia of AIST for their valuable comments.
Sarath Delpatchitra is an Associate Professor of Finance at Flinders University.
Deborah Ralston is a Professor of Finance at Monash University and Executive Director of the Australian Centre for Financial Studies.