Industry superannuation panic merchants liquidate assets

When the Morrison Government first announced that financially struggling Australians would be allowed to access $20,000 in superannuation savings early, industry superannuation funds were in uproar claiming the policy undermines the compulsory system and would strain their liquidity.

Shortly afterwards, these same industry funds pleaded for emergency liquidity support from the Reserve Bank of Australia (RBA), which was rejected by the federal government on ‘moral hazard’ grounds.

Fast forward three weeks and industry superannuation funds have begun to liquidate assets in a bid to meet member withdrawals:

Hostplus has notified property fund ISPT that it wants to redeem $1.5 billion, which is about 10 per cent of total assets in the ISPT Core fund.

For Hostplus, $1.5 billion represents nearly a third of the property holdings in its flagship MySuper balanced option.

As of early April, 12 per cent of the balanced fund. or $5.4 billion. was invested in property, the vast majority of it unlisted. Another $4.4 billion was in unlisted infrastructure.

Industry funds have delivered some of the best returns in the superannuation sector over both the short and long-term trading on a so-called “illiquidity premium”.

Because most their members come from areas like hospitality, retail and tourism, and are younger than average, they have leveraged heavily into illiquid assets like airports, ports and toll roads, as well as private equity funds.

The assumption was that because their member base was young, and wouldn’t need to access their retirement funds for many years, they could lock members’ savings into illiquid long-term assets. 

Of course, that assumption has been destroyed by the COVID-19 pandemic and the Morrison Government’s early release policy, which has caused a rush on withdrawals and a collapse in mandatory inflows their membership bases have lost their jobs:

The situation for these industry superannuation funds is unlikely to improve anytime soon, with the Grattan Institute this week forecasting that the hospitality, tourism and retail could lose between one third and three quarter of jobs following the COVID-19 pandemic:

This means industry superannuation, which have a high proportion of illiquid assets, will be scrambling to meet members’ withdrawals.

Unconventional Economist
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Comments

  1. Yes, and the other members will suffer because the Government changed the rules of the game at half time and wouldn’t help them because they are “Union” funds, which of course they are not, they are “equal representation “ funds.

    • Yep, and MB appear to be applauding this cynical and opportunistic attack by a conservative government on industry funds and retirement savings for workers.

      Strange days.

      • The money belongs to the members not the funds, if they want access to their money they should have it! Maybe going forward Industry Funds will introduce risk management strategies. Probably not though…

          • Know IdeaMEMBER

            I believe it is generally referred to as “regulatory risk”. The standard risk management is to engage lobbyists.

    • The government changes the rules all the time and the market doesn’t always rise across all asset classes. Most responsible funds (incl Industry funds) run many scenarios including armageddon and need to manage their risk accordingly which includes liquidity risk (not only is it good practice it’s the law). Asking for a bailout or screaming it’s unfair is just BS – no different to IP specufesters wanting a handout.

        • Agree it is the members that suffer. In saying that they got higher returns due to this riskier strategy – just that they weren’t informed of this risk so have been mislead in terms of risk they were carrying. I still think some of the Industry Funds are the better funds and when asked advise friends to choose these with the required health warnings of what really is balanced, what type of Insurance terms are included, etc.

          • Jumping jack flash

            They were well-informed, at least I was about 15 years ago when I got a nice letter from my employer at the time saying that they were going to transfer my super into a shiny new balanced option which was “medium risk”.

            I declined.

            “Risk” just means nothing because there is no context and also no risk.

      • Well said.

        Political risk just another to add to the myriad risks which are perennially ignored by investors / participants in any number of schemes. Ignorance is no defence last time I looked.

  2. What is Australia going to do when this is all over? Just shake it off, go back to doing everything the same as before, assume that it was a one-in-a-century black swan and that nothing like it will ever happen again therefore no need to worry about anything like it again? While I am sure some people will, I doubt the country as a whole will.

    • unlikely. the vote for Scomo was overwhelmingly for “we’ll be right, nothing needs to change, everyone is a winner.”
      if he promises that everything will go back to the way it was, that the Boomers will get bailed out and that nothing will be done about changing the bloodsucking system that bleeds younger and future generations dry – he’ll be in power for longer than Menzies.

      • Yes, but that is when nothing bad had actually happened in over a generation. Even the GFC didn’t really have much of an effect. This is different. It’s now become obvious in many ways to many people that Australia is heavily exposed to all kinds of risks. Could be wrong, but I really can’t see it all going straight back to how it was. There will be many people who will ask the question, rather than blindly jump in. Not to say all will be like that of course, but enough will.

        • i’ve got my fingers crossed – but I doubt it. See Olaf’s post – they’ll just turn the screws tighter on the young and poor.

      • Jumping jack flash

        This!!

        Well said. Any attempts to change anything At the time was simply fodder to throw suspicion and criticism.

    • They have already declared it is going back to normal just with lower corporate tax and more “flexible” IR.
      Everything else continues as before.

      • Idiots (and luddites) believe in return to the past
        Realists see a shift to the future, whether they like it or not

    • Jumping jack flash

      100%

      Ponzis are usually destined to rapid failure but super has such tight rules around it that it could happily operate for decades.

      If Bernie’s had the same rules it’d probably still be operating too!

      • – All was well for the Super industry when the inflows of money + capital growths were larger thatn the outflows. But now the outflows are growing in combination with an ageing population (in spite of the immigration) make it a Ponzi scheme.
        – But we haven’t seen the largest wrecking ball for the Super industry & the Super funds. And that wrecking ball is called rising interest rates.

        • Jumping jack flash

          You speak the truth! But interest rates can’t rise. There’s at least 2 trillion reasons why they can’t.

          • – Rising interest rates don’t have to be a problem as long as wages rise (enough) at the same time but I don’t see why wages should go up any time soon.
            – Agree. There’s simply TOO MUCH debt in the system. Not only here in Australia but in the ENTIRE developed world. No, this is not going to end well.

        • Wrong answer.
          The wrecking ball is boomers pulling their dough to fund their retirement, selling their assets to create cash. That’s what kills the system

          • – Agree. it’s predominantly the group of Baby Boomers that pull their money out of the Super funds. But this was bound to happen sooner or later ANYWAY. Immigration or no immigration. COVID-19 or no COVID-19. The problem is that younger generations haven’t been able to save as much as the Baby Boomers in their super fund accounts. Thanks to e.g. interest rates going lower and lower.
            – As long as the inflow of money is larger than the outflow then the funds were OK but it seems that the Super fund industry is going to implode much sooner than anticipated.

  3. Tiananmen Square Massacre

    This will be a mean place to live in 12 months when the JobKeeper and JobSeeker dries up, no more 6 month moratorium on rent and mortgage payments, 500 people fighting over a job ad.

  4. In some ways I can understand & have a bit of sympathy for the “you changed rules at 1/2 time” so what about me. But the Industry Funds & very much in particular HostPlus Balanced was being discussed a lot by many commentators & not “right wing, neo liberal, conservative” people, but everyday investment commentators. And they overwhelmingly said the Unlisted mark to make believe investments were a very big risk & HostPlus was ignoring it at its (members) peril. I recall reading stuff about this years ago & have had many conversations with Investors/Members re the same. So Hostplus hasn’t been handed an unexpected red card; they took a punt on excessive earnings & very much took on outsized risk. They were happy to advertise their high returns without truthfully explaining what was really going on. I see this as a very big stuff up by Hotsplus management & their board of directors. They haven’t lived up to their members expectations & should walk as required. The right wing nut jobs may well be attacking/circling but this has been talked about before. Hostplus derided anyone who challenged their methods. Didn’t the head guy some time ago say cash was lost money or something like that? I can recall that they were challenged as to what their definition of Balanced Fund was & they talked total bullsh!t.