Sydney Morning Herald | 30 March 2020
Every industry needs to play its part to beat the coronavirus. Superannuation is no exception.
Yet there is some disagreement over the government’s decision to help people in need by expanding early access of super.
The Parliament has passed laws to enable Australians access to up to $20,000 of their superannuation tax free, including up to $10,000 in the current financial year to 30 June, and another $10,000 after July 1. For most funds, this is a small change.
Rice Warner Actuaries estimate that the most significant impact will be limited to one quarter of the super funds, where just 10 per cent of members will take some of their money.
Funds are expected to have more than adequate liquidity to endure even the harshest downturn in markets and customers switching between funds and investment options.
Retirement savings are the private nest eggs of Australian workers. Those who are facing financial hardship in the current crisis need access to their money now.
It should not be forgotten that hardship grounds already exist for early access to super.
The new measures streamline those requirements to make sure Australians get access to their funds without having to wait until they are at risk of losing their home.
Many people are losing their livelihoods and are struggling to buy the essentials. It is time for super funds to step up and help their members.
What the government is asking the industry to do is modest, reasonable and necessary. Treasury estimates the policy will result in about $27 billion being withdrawn from the $3 trillion superannuation system – less than 1 per cent of total super savings.
Reports that some super funds are liquidity constrained must therefore stem from issues pre-dating notification of the government’s stimulus package, and even the outbreak of the pandemic itself.
Superannuation funds which may have over extended into illiquid assets, such as infrastructure and property and who did not retain adequate cash and other liquid holdings, did so knowing the risks they were adopting.
The past 100 years has delivered a depression, a World War and a range of unpredictable events which have damaged the economy and investment returns. Trustees have to prepare for these events and invest prudently for the proverbial rainy day.
The strong investment returns on illiquid assets is, in fact, referred to as the ‘illiquidity premium’, a reward for the risk funds are willing to adopt when they buy these lumpy assets that are hard to sell.
To tout strong investment returns off the back of illiquid assets in the good years, only to come to the government cap in hand when markets inevitably turn, is simply a sign of bad management and poor investment governance.
The opening paragraph of APRA’s Prudential Standard for Investment Governance requires a superannuation fund “to have in place a sound investment governance framework for the selection, management and monitoring of investments... including investment risk.”
The standard requires regular stress testing which reflects the underlying assets the fund owns, and board oversight of the results of stress tests.
Liquidity constraints would likely also stem from weaker contributions as unemployment rises, and higher switching behaviours as fund members move between investment options and exit funds that are overexposed to illiquid assets. Again, however, this behaviour is not unusual in a market downturn and would be included in prudent stress testing.
If prevailing market conditions require superannuation funds to sell assets at depressed prices, and therefore exacerbate poor investment performance, members should be asking hard questions of their fund’s management team and trustee board.
The impact of the coronavirus on the domestic and global economy is clearly unexpected and severe. It should not give cover to super funds for imprudent practices. Attempts by funds to deflect criticism is simply abdicating responsibility for mismanagement.
Andrew Bragg is a Liberal Senator. His book about the superannuation industry, Bad Egg, will be published in May.