SUPER FUNDS’ top risks include outsourced providers, administration and unit pricing/crediting rates, with one of the lowest risk rates attributed to alternative investments, according to a survey of the industry.

However, those that conducted the survey, Deloitte and the Institute of Chartered Accountants Australia (ICAA), said the response was at odds with the focus of internal audit and the views expressed about the dangers of alternative investments by many in the same organisations.

The survey found that unit pricing/crediting rates were the third least included in annual reviews of internal audit programs. Administration of internal controls was the most included and 36 per cent of respondents outsource their internal audit.

On alternatives, it found only half were comfortable with the basis for valuing alternatives and 56 per cent rated the investment reports from this category as adequate or poor.

Overall, governance and risk management by super fund trustees now, compared to before licensing was introduced just over three years ago, is like “night and day”, according to Richard Rassi, a partner at Deloitte and one of the authors of the survey.

Seventy-eight per cent of respondents rated the quality of their risk management as excellent or above average, but Rassi said many agreed they needed to “adopt a partnership approach” to get better quality from outsourced providers.

The study also found the need for improvements in data analysis to combat fraud, and the use of more automated tools to improve compliance monitoring.

Twenty-seven per cent of those surveyed said they were not satisfied that the current regulatory environment addressed the risks of alternative investments and some called for better guidance from regulators on alternative and complex investments.

Seventy per cent of respondents had invested in alternatives – which included derivatives, hedge funds and private equity. More than 80 per cent had invested in private equity and close to 70 per cent in hedge funds, as well as a smaller number in other investments like infrastructure.

“These are very sophisticated investments. There are unique risks that emerge from this area. I think the industry would benefit from some very practical, transparent guidance on what they should be looking for, what sort of due diligence they should be conducting, and what are the factors they should be considering before they enter into those investments,” Rassi said.

Participants said these areas could expand to include mortgages and loans, public-private partnerships and land development.

Two-thirds of the super funds surveyed said the registrable superannuation entity regime introduced in mid-2004 had significantly improved their risk management practices and documentation.

“Without a doubt most of the participants would agree that there has been improvement to the discipline and structure to governance frameworks around superannuation funds. Standards have been tightened and better documents are in place,” said Rassi.

He said the new regime had also hastened the exit of funds that were “on the margin”, and seen funds merge to cope with the cost of the regulations and there was likely to be further consolidation.

Figures from APRA released late last month showed 1,277 super funds exited since June 2004. It said more than 70 per cent of these did not have an investment manager and more than 30 per cent had invested all assets directly.

The regulator found the average number of investment managers per fund rose from 1.4 at June 2004 to 4.6 at June 2007. The proportion of funds that directly invested all their assets decreased from 24 per cent to 6 per cent in the same period.

More than 90 per cent of respondents to the Deloitte/ICA survey said they had a documented set of governance policies, and 78 per cent of them said directors were familiar or very familiar with them.

Andrew Stringer, head of audit at the ICAA, said respondents were also keen on improving the training of directors and what they get paid. Around 60 per cent of those surveyed received between $20,000 and $50,000 per annum, and only about 15 per cent received more than $50,000.

See APRA super vision above