Industry superannuation funds plead for liquidity support

Last week, the Morrison Government announced that it would allow cash strapped Australians that have lost their jobs to access up to $20,000 in savings from their superannuation fund.

It is anticipated that the measure will lead to withdrawals of between $27 billion to $60 billion, which has prompted calls from industry superannuation funds for a ‘liquidity backstop facility’ from the Reserve Bank of Australia to enable them to honour the government’s commitment without having to sell-off assets:

The Reserve Bank has been quietly working out ways it could establish a government-backed facility to help superannuation funds pay redemptions allowed under new rules to deal with the coronavirus crisis, even though the idea has so far been rejected by the treasurer, Josh Frydenberg…

The government predicts up to $27bn will be withdrawn, but some super funds say redemptions could be as much as $60bn…

Some funds, led by the union-and-employer-controlled industry sector, want the government to underwrite a “liquidity backstop facility” that would provide immediate cash to pay withdrawals. For-profit funds oppose the idea.

There is no suggestion any super fund is at risk of collapse. Rather, industry sources fear that the forced sale of assets would crush their value, crimping returns for people who remain in the fund.

Assistant Superannuation Minister, Jane Hume, has acknowledged industry superannuation funds’ “structural weakness… that has been hiding in plain sight”, whereas Coalition MP, Andrew Bragg, accused industry superannuation funds of “bad management” for being overly exposed to illiquid unlisted assets:

Superannuation funds which may have overextended 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 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…

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.

However, University of Melbourne finance professor, Kevin Davis, backed the provision of liquidity support from the RBA, arguing that its is far superior than making industry superannuation funds sell distressed assets at fire sale prices:

…surely, one of the benefits of the super system is that it creates long‐term savings, capable of funding long term illiquid investment in infrastructure which Australia needs. That seems like a natural and good fit (as long as the super funds have the expertise to pick good long term projects).

In this regard they are filling a gap left by our banks which, paradoxically, rely heavily on very short term finance to make longer term housing mortgage assets. That exposes them to liquidity risk, and in circumstances such as this, ability to access liquidity from the Reserve Bank is available by use of repurchase agreements.

Why doesn’t Senator Bragg want similar facilities available to the super funds in the current situation? He appears to think that this would be like a “bail‐out” where taxpayers bear the losses of a private financial institution if it fails due to excessive risk taking, but where the owners of such an institution reap the rewards if successful. But that confuses insolvency and illiquidity.

… a sensible approach, would be to allow super funds to borrow from the Reserve Bank in this way in this crisis period – where extra cash wanted by members is needed because of the change in government policy.

Now, MB provides a superannuation fund with our partners at Nucleus Wealth.  So we are not an unbiased observer.

With that disclaimer though, next-generation super funds like ours hold each client’s assets in separately managed accounts. So, you don’t get the problem where the actions of one investor impact other investors who are doing nothing.

Most of the problem, which these funds are admitting by inference, is that the value they are telling everyone the unlisted assets are worth is not the true value. As noted on Monday by our Head of Investments at the Macrobusiness Fund, Damien Klassen:

A few industry funds have written down assets. For example, AustralianSuper has revalued its unlisted infrastructure and property holdings downwards by 7.5%.

But look at the rest of the market. The listed property sector is off more than 40%. Airports? Down 30%+. Private Equity? Ha! You are telling me that illiquid shares are worth a few per cent less while listed shares are down 25%+ and illiquid bonds aren’t even trading?

The writedowns help, but are nowhere near the level the assets would sell for today…

This, according to Klassen, can lead to perverse incentives and a ‘prisoner’s dilemma’, whereby those that withdraw funds early before assets have been written down will receive an over-sized redemption, whereas those that remain in the fund will have their investment value diluted.

So, maybe the first step should be to actually write down the assets to an accurate value so that people who are leaving don’t shift the cost onto those who are staying?

I’ll leave it to you to decide whether industry superannuation funds’ heavy exposure to illiquid assets is a strength or weakness.

Just be aware that if you are a loyal member of one of these funds, the value of your investment will absorb the losses and could get heavily diluted if enough members take up the government’s early redemption offer and leave.

Leith van Onselen
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Comments

  1. – OMG. Do the Super-funds now also want a bail-out ? and what have they done with all those profits & fees they were charging over the last years ?

    • DingwallMEMBER

      Yep …. they need to be managing risk not expecting things are fabulous all the time

    • DominicMEMBER

      Funny that. All those who’ve been filling their pockets with gold these past years are demanding a bailout. It’s like there’s this structural entitlement for these people to continue to enjoy the good times. It’s patently clear that there was never any ‘planning for a rainy day’ or appreciation of risks.

      Give them a bailout but the price must be the jobs of the management. Whatcha wanna do?

      • Management losing jobs is not enough. Any bailout should come with nationalisation. No exceptions.

        • I would have thought that management losing their cosy sinecures would be enough to persuade them to think twice before going to the Gubmint, but you know, I’m open minded.

    • DominicMEMBER

      Actually, I’ll walk my comment back. This is Govt interference so …

      The bailout requests that are not justified will come though later when the illiquid assets are discovered to be not worth what they were marked at and the fund is unable to fulfill its obligations.

  2. I don’t think they’re asking too much.

    If this country needs something it’s certainly real equity INVESTORS, rather than just equity-market speculators. Industry super funds are closer to fitting the bill, than are retail funds.

    So there.

    The Libs’ stupid crusade against industry funds is, course a total disgrace. Shameful.

    • Yep, the private super funds have one objective and that is to force the public into their fat fee gouging arms.

      The industry fund hate club would be more believable if they were promoting RBA reserve accounts for everyone so that the difference between saving and investment was crystal clear.

      Saving would then mean accumulating central bank liabilities in zero interest (but also zero fee) RBA bank deposit accounts.

      Investing would mean transferring control / title to some of your central bank liabilities to someone else in return for an agreement that they will pay you a return (fixed or variable) for being given control /title to your central bank liabilities. Investing would also mean sometimes you will lose some dough if you make bad choices.

      And yes investing would involve trust and judgment.

      It would resolve the current swamp where poor Joe public thinks they are “saving” when.

      1. They are making unsecured at call investments in dodgy private banks ( private bank deposits)

      2. They are being forced (with some tax effective sugar inducement) to transfer a chunk of their wages each week to “investment” managers who promise to return only what they don’t extract in fees or lose in dud investment choices in the mean time.

      But don’t expect too much discussion of this.

      Everyone has a book to sell in Australia.

    • Tassie TomMEMBER

      Peachy I kind of agree with you there.

      It could be argued that one weakness of the MB fund on a macro level is that it is unable to invest in, for example, a $300 million dollar farming enterprise even though it might be a great investment with growth potential, as each investors’ assets are ring-fenced and not pooled.

      As an investor though (and conflict of interest – I have an MB account myself) I like the fact that my investments are ring-fenced.

      • DominicMEMBER

        Having a ring-fenced fund leaves you footloose and fancy free. Being tethered to a large, impossible to sell/realise infrastructure asset leaves you with a yoke around your neck. That said, as long as you make choices voluntarily it’s all good. That way you have no right to complain.

    • so it all comes to one question:
      should the profit be the only measure of investment strategy sucsess?
      Is it the same if one just makes profit from day trading or one that leads to better employment, improvement of general quality of life, …

      Answer NO leads to the next question:
      should the tax treatment of all investments than be the same? Should someone investing in a food processing company pay the same CGT and profit tax as someone who is gambling on a stock-market, trading junk bonds or shorting the very same food processing company?

      • That’s right.

        These days, nobody is distinguishing between “investing” and mere “risk taking”.

        I guess it’s “too hard” to distinguish…. besides – doesn’t serve the moneyed interest – namely, finance capital.

        • It is not that difficult.

          The finance industry sophists roll that one out as though even trying to reduce the policy support for speculation is a waste of time. Oh but what about this? Let’s give up on the whole idea.

          Only need to look around the world to see countries who understand that while there will always be speculators having a punt that does not mean that policy cannot be directed to discouraging mere punts and supporting and encouraging productive investment that expands the productive capacity of the economy.

          But starting with the super funds is not going to get far while punting on asset prices, especially with debt, is fundamental government economic strategy.

          • “… punting on asset prices, especially with debt, is fundamental government economic strategy.”, and ‘more people’ of course to engage in that policy.
            The alternative of ‘doing more with what we have’ seems to be all too hard.

          • Yes, pfh. That’s what I mean the “too hard” canard = “not convenient for finance capital“.

            It’s not actually very hard.

      • DominicMEMBER

        Doc, I wouldn’t worry yourself. Day traders rarely make any money to tax. 99% of active day traders with no prior experience lose money over any extended period.

        The mum n dad investors who make money are those who buy stocks and sit on them – statistically stocks go up more often than they go down, so, it’s not hard.

        As for investing in real business, isn’t that what the stock market was set up to do? Provide access to the average Joe. You try and invest in a privately owned business – very difficult, expect through some ‘Angel’ Investment clubs and the likes.

        Speculating is highly risky – the clue’s in the name. If it were easy we’d all be doing it and all be getting rich. Of course, having a Govt and monetary system in your camp certainly swings the odds in your favour – ‘cept when say, an inconvenient pandemic arrives, the risk becomes real and Govt is rendered impotent.

  3. They got a slight reprieve. The ones most likely to pull their money are on lower incomes, if they qualify for jobkeeper they won’t be able to pull their super.

  4. Of course the industry funds should be supported. This problem has only come about due to the sudden, untelegraphed, stroke of a government pen. Otherwise the government should be sued.

    • Quite right. Much better to have allowed a virus of unknown toxicity to rage though the community and see what’s left afterwards. Maybe, everything, Maybe nothing. Then , the Super Funds would be able to make better judgements.

      • Nah. If the govt wants some people to have an extra $20k, then they should provide it.

        Not force superfunds to have to provide it, out of the blue.

    • WTF – The gov is making changes to super every year with the stroke of a pen. How is the Industry Fund any different to the IP owner – If a fund decided to invest in a caravan park without regard for possible liquidity needs or diversification and then when that asset declines in value the fund claiming preservation of mark to market returns should be supported is no different to the mum & dad IP owner requesting a bail out.

  5. I’m not normally in the habit of defending industry funds (and the very wide universe for which that description covers!) BUT, these monies were invested on an asset-liability matching basis. Those liabilities have now fundamentally shifted due to the stroke of a policy pen (previously thought to be off limits).

    This issue may be even more acute for funds within restricted memberships, think of the govt schemes were member monies couldn’t even be rolled to an alternative provider. Those funds were operating on the basis of almost guaranteed liquidity for 30 years and now it has changed overnight. An investment policy will hardly be able to account for that, unless you made a decision not to own unlisted or liquid exposures all together (which would be rare for many, large institutional funds)

    None of this would excuse generally poor liquidity management or an over reliance on unlisted assets within an investment strategy. But the ‘super is bad’ and ‘unlisted assets are a scam’ narrative is unsophisticated commentary at it’s finest, especially so when it is sprinkled with the marketing pitch of “look at the retail super we offer over here”.

    • +1
      On one hand this forum has whinged many times about how Australia doesn’t use Superannuation to invest in large infrastructure projects and now they are whinging because they have done just that and can’t easily sell.
      Maybe the Super funds don’t have enough ‘Cash’ available for the current situation but how many people foresaw the government allowing potentially millions of people to suddenly access their Super?

  6. Excellent comments from various posters above.

    I have many concerns with our superannuation system. These aside, the cretins running the super funds have been allocating the funds more or less appropriately given the system they work under:

    * 9% of wages regularly taken out of workers pay
    * payouts when workers retire in predictable fashion
    * govt cretins force interest rate toward 0% – limiting asset choices

    This has been going on for many years and has been more or less slow and predictable.

    However now in 2020 govt cretins decide that 1000’s of workers can all withdraw 1000’s of dollars from their super all at once to deal with this virus shutdown. It is completely unreasonable to expect the existing super system to be able to deliver that.

    The super funds do indeed own many assets that have a large theoretical paper value in normal circumstances. But who exactly do these govt cretins expect the super fund cretins to sell all these assets too at short notice?

    • There is a number of prudential standards that cover investment governance, risk management and pandemic planning for superfunds. If done correctly this would not be a problem. If a fund teeters on the edge of collapse they may have broken the law…

      19. An RSE licensee must, for each investment strategy:

      (a) determine appropriate stress scenarios that cover a range of factors that can create extraordinary losses or make the control of risk in the investment strategy difficult; and

      (b) undertake stress testing based on the scenarios in paragraph 19(a) to confirm that the strategy is appropriate, prior to implementation.

      • Byron,
        That is interesting and I’m not having a go at you but…

        The super funds either can either be there to:
        A) support workers in their retirement
        OR
        B) support workers during a severe pandemic

        In case A the assets in the fund should be pretty much what they are now
        In case B the fund should be entirely in cans of baked beans and longlife milk.

        Personally I don’t care what their role should be. I just want to see it properly defined and then performed diligently according to the definition. I’m sick of all the BS and frauds in our society.

        • Jumping jack flash

          Agree. At the end of the day these are conversations and scenarios that should never occur with super.

  7. Jumping jack flash

    “He appears to think that this would be like a “bail‐out” where taxpayers bear the losses of a private financial institution if it fails due to excessive risk taking, but where the owners of such an institution reap the rewards if successful”

    Yes, yes it is.

    Look more closely, Kevin. When you see it you’ll defecate building materials.

  8. Providers not writing down assets in a timely manner complicates changing your option back to a higher growth/riskier option when the markets turn (assuming I didn’t just miss it! 😜). In which case hopefully the fall will go longer so they have to write it down before we have thou move back.

  9. For fuck sakes. Super is not a government, employer or gift from the gods hand out. It is foregone wages and salaries for the majority. Any person at any time should be allowed to access their earnings regardless of govt bluff coercion and bullshit. Everybody has different circumstances at any given time. You cant have your wage savings pot today when you are broke and going to be homeless but think of the future when you can have gold plated coffin handles. As long as a person is willing to pay the forgone tax which is now brought to the present what the fuck is wrong with the individual spending his wages or salary as he sees fit???
    Hi Janet a Kiwi told me this was possible in NZ but I never looked it up.

    So its back to bad bets on bad debts by unknown shysters and its YOUR wages and salaries are locked in by govt edict. Fuck that nonsense. I want mine in the craw every payday and fuck your govt sponsored unicorns and rainbows.