Industry superannuation funds face obliteration

Over the weekend, it was revealed that nearly 900,000 Australians have registered their interest to withdraw part of their superannuation nest eggs early.

This follows the Morrison Government’s announcement last month permitting those suffering from financial hardship to withdraw $20,000 from their superannuation savings, beginning from 20 April.

The number of applications for early release was up 260,000 over the past week and is already nearly 70% of Morrison Government’s forecast of 1.3 million people:

Meanwhile, the Australian Treasury forecast that up to $27 billion would be withdrawn from superannuation balances, whereas the superannuation industry estimated early redemptions could top between $50 billion and $65 billion.

I have previously argued that even $65 billion of withdrawals should not pose significant difficulty for the superannuation system, since it would constitute less than 2.5% of total superannuation savings of $2.8 billion as at December 2019 (latest available data):

The problem is that some industry superannuation funds operating in areas hardest hit by the COVID-19 lockdown could face the bulk of withdrawals, thus endangering their viability. The AFR’s superannuation writer, Joanna Mather, described this as the “black swan for super in the virus crisis”:

The virus-induced shutdown of hospitality, tourism and retail is putting pressure on super funds with large membership bases drawn from those industries, and possibly others if a deep recession emerges.

Funds face a double-whammy of early access claims under the government’s hardship scheme, plus the drying up of super contributions by employers until people can get back to work…

Amara Haqqani, the director of insights and strategy at Milliman, a global actuarial firm specialising in retirement, said… “This crisis has shed light on what the risk posed by the connection not just between employment and retirement savings generally, but the link between specific employment and specific super funds”…

“We had this notion that the constant inflow of compulsory contributions coming from employment benefits would insulate the funds.

“In the end, the black swan event was that employment itself has been called into question across entire sectors, and with it, the concept that there will always be a constant level of super contributions to rely on.”

It will be interesting seeing how this plays out. Industry funds operating in hospitality and the arts look like they will be hardest hit, according to the Grattan Institute’s latest unemployment projections:

As shown above, these two industries could lose up to three quarters of their jobs under the worst case scenario, which would obviously put tremendous pressure on industry superannuation funds operating in these areas. 

When the crisis is over, regulators will have to give greater consideration into ensuring that superannuation funds are not just liquid and diversified in the asset mix, but also that their member bases are not too concentrated in a single industry.

This will rub salt into deep wounds as returns for members will necessarily fall.

Leith van Onselen
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Comments

  1. I see Channel 9 (ACA) is running a special next week billed as “financial advice” on whether you should withdraw your $10K from super.

    Some vested interest somewhere must be worried…!

  2. What accounts for the very wide “confidence interval” for healthcare workers in the last chart ?

  3. Tiananmen Square Massacre

    A lot of people will be using that $20k in super to add to their house deposit.

    • Yes, some people will, but this doesn’t necessarily mean it will impact prices in the same way as a fhog does.
      If we anticipate tightened lending criteria and in particular that is likely to look like improved LVR’s then $20k will barely nudge the deposit for a median priced home.

      It’s a small pool of buyers we are looking at anyway. By definition it’s those who:
      -have lost a job or had hours reduced.
      -have a sizeable deposit already
      -are ready to buy
      -meet new lending criteria
      -find new (and somewhat secure) employment

      That last point is key. Without job security nobody is going to take on a mega mortgage.

      Disclaimer: self interest here. I’m yoinking both lots of $10k. Adding to my deposit. With any luck should find work but won’t be rushing out to buy.

    • Aaron is right. Overwhelmingly, Super funds won’t let people take the cash unless they can demonstrate hardship. Banks won’t give people a loan unless they can demonstrate non-hardship.

      • kannigetMEMBER

        The Super funds are not making the decision, its the ATO, and the getting the $20K depends on showing hardship not just applying. That said, if the monkey from the shire decides its a good idea to let everyone have it then thats what the ATO will do..

        • Depends on showing hardship? I’m afraid I’m going to have to contradict you there. You see, I just went in to my.gov and to the ATO site. Today they updated the site to include the covid-19 superannuation withdrawal process. It was VERY basic. Literally just click a radio button to declare you are eligible. —> enter your bank details. —>select your super fund and the amount. —>confirm.

          Just consider the volume of applications and ask what sort of “checking” the ATO will be doing. They might data match based on whether you are still receiving a salary. But it’s not entirely straight forward to check that, since the criteria allow for variables.

          (I qualify due to redundancy on 1st April).

          • kannigetMEMBER

            I am sure there will be some data matching going on, but I am not sure you contradicted anything I said…
            1) Its the ATO deciding and not the super funds….
            and
            2) I said “That said, if the monkey from the shire decides its a good idea to let everyone have it then thats what the ATO will do..”

            All you did was confirm my second point….

            Sorry to hear you have been made redundant, Hope you get back on into work asap, assuming thats what you want.

          • Thanks kanniget, appreciate it. With any luck I will land a job quickly. I just put in for a role at WorkSafe (Vic) which is quite niche and I’m well qualified for. Fingers crossed.

  4. So what happens when a fund has more withdrawal requests than they can fund with their entire pool of liquid assets and puts a stop to withdrawals? Government says you must allow it, fund says they cannot. What then?

    And what are the implications for those in these funds that might be 100% in liquid assets rather than the unlisted assets most attention has focused on? Do they lose out?

      • Jumping jack flash

        I’m fairly sure that’s what my fund is already doing. I’ve been receiving some very strange emails and PDFs lately from them.

    • Those are the questions that LvO has been asking …. and precisely why the funds are scratching around for a bailout. They effectively want to repo their illiquid assets with the RBA.

  5. An example of ido logically driving policy where economic issue needs assistance. Still a good chance that those fwits can burn the whole thing to the ground. Starting from scratch is my preference for Australia.

  6. I am GrootMEMBER

    It isn’t evident that Scomo and co use anything deeper than first order thinking with these policies. Deliberate attacks on Industry Super thoughts aside, are these type of consequences really that hard to predict? Apparently.

  7. … constitute less than 2.5% of total superannuation savings of $2.8 billion as at December 2019 (latest available data):
    LVO, correcion. It’s $2.9 trillion.

    • I suspect due to volume of applications there will be less scrutiny than a Chinese application to buy property with FIRB approval.
      Still, you’d want to make sure you can evidence your grounds for withdrawal.

    • Jumping jack flash

      What’s the process? I’ve lodged my interest using MyGov, do I need to wait for another form?

    • I applied on Monday. Around 9pm Tuesday night I got an sms from my fund stating it was approved and processed. Wednesday morning I got an sms from the ATO saying it had been processed. Thursday $10k deposit cleared in my account.