The role of the custodian post pandemic

As the COVID-19 pandemic affected organisations across the world in 2020, the challenges faced by superannuation and pension funds worldwide were an important reminder of how nimble today’s businesses need to be to survive.

Super funds saw a huge spike in switching and withdrawal requests, which for some brought challenges with managing liquidity. Further, the switch to home working meant many providers were increasingly focused on their digital capabilities, in order to continue to operate effectively and manage client expectations.

As one of Australia’s largest super fund custodians, BNP Paribas Securities Services worked closely with clients to help them meet many of these challenges. What we have seen is an acceleration of existing trends and in some cases a permanent change in the way super funds operate. Here we outline some of the key trends we are witnessing and the role we are playing as custodians.

Stress testing funds to meet future challenges

The market volatility of 2020 meant super funds were overwhelmed with requests from clients seeking to minimise losses by switching to less risky assets.

The Australian Taxation Office (ATO) Early Release of Super Scheme, which allowed Australians experiencing hardship to withdraw AU$10,000 from their super fund in 2019/20 and a further AU$10,000 in 2020/21, also resulted in an extraordinary number of withdrawal requests.

Some 1.5 million Australians applied for early release of their superannuation in both financial years (between 20 April and 31 December 2020). In total, there were 4.5 million approved applications to release super from APRA regulated super funds, totalling AU$37.4 billion[1].

While some super funds were well prepared, for many the impact was that asset sales were needed to meet the resulting liquidity requirements.

As a result of the pandemic, more super funds are now focused on stress testing their investment strategies to ensure they can balance performance and liquidity during extraordinary market events. As custodians, we have a key role to play here, providing access to the latest risk analytics tools, along with the governance resources to ensure super funds remain compliant with changing regulations.

The acceleration of the digital trend

We live in a digital age and prior to the pandemic many super funds were already focused on using digital innovations and data to increase their efficiency, improve the client experience and adapt to new trends. However, COVID-19 accelerated some of these trends.

In order to adapt to the changed operating environment, some organisations looked for partnerships with fintech providers.

Currently, one of the biggest challenges for asset owners and managers is the time and cost involved in engaging and working with an ever-expanding group of fintech companies.

We are working with an increasing number of medium and large funds who are taking a partnership approach to connecting with third parties to ensure they obtain the relevant information and data they need to continue to operate.

For example, a key priority for asset owners today is ESG disclosure. Sustainable Finance Disclosure Regulation (SFDR) in Europe is now in place and is a significant step on the path towards sustainable transparency, requiring all financial market participants – not just ESG focused firms – to disclose how they manage sustainability risks.

We are also seeing similar trends in Singapore and Australia, with governments increasingly steering asset owners and managers to a stronger sustainability focus.

Our strategy is to assist clients in sourcing the data they require by partnering with a range of fintechs through an open architecture ‘plug and play’ model, simplifying the process for clients and enabling us to bring specific insights and value to the end-to-end process.

Regulation back on the table

The COVID-19 pandemic meant a number of regulatory reforms in Australia were put on ice. However, many of these initiatives are now firmly back on the table.

The Australian Prudential Regulation Authority (APRA) recently released its multi-year transformation, which aims to support improved outcomes for superannuation members. We are working closely with clients on the Superannuation Reporting Standards 550.0 Asset Allocation.

Some other key pieces of regulation funds are working towards this year include Portfolio Holdings Disclosure; RG 97 – disclosing fees and costs in product disclosure statements (PDSs) and periodic statements; and over-the-counter derivatives reform. This year will see the introduction of segregated initial margins within the Prudential Standard CPS 226, which covers margining and risk mitigation for non-centrally cleared derivatives.

With more regulation ahead, it is critical that super funds continue to keep in mind upcoming changes. We are working closely with clients to help them prepare their businesses as they approach.

Summary

Looking forward, we believe custodians will have an important role to play in helping superannuation funds position themselves in the post-pandemic future. We proactively engage with super funds to aid their understanding of the new regulatory obligations and provide innovative solutions to increase efficiency, ensuring super funds are supported for future growth.

Please contact us to find out more information.


[1] ATO data, 2021