Labor’s shadow Treasurer, Jim Chalmers, has penned a letter calling on the Reserve Bank of Australia (RBA) to provide a liquidity backstop for cash-strapped superannuation funds so that they can meet member’s redemption requests. Chalmers’ request has arisen following the Morrison Government’s announcement that it would permit Australians to access up to $20,000 in savings from their superannuation so that they can weather the coronavirus storm:
“Labor is committed to continuing to work with the government so that this scheme is a success, but we fear that the government’s decision to drastically expand the conditions for early release of superannuation could cause liquidity issues that threaten the integrity of our super system for all Australians if they are not addressed”… “While some self-managed super funds may have large cash holdings, many other funds do not have large cash holdings”… As millions of Australians lose their job or a portion of their income, super funds would be receiving less incoming cash and this could leave them having to sell equity holdings to pay for the scheme, they warn, saying a “wait and see approach” was not appropriate as funds need to act immediately.
Labor has tacitly admitted that Australia’s superannuation system is a giant Ponzi scheme whose “integrity” is reliant on ever growing fund inflows via the mandated 9.5% superannuation guarantee. Unless the amount of money coming in from new investors is enough to cover the redemptions of previous investors, Australia’s superannuation system will implode. This is because the level of one’s retirement income is dependent not just on the performance of the superannuation fund’s underlying investments, but also on whether they withdraw their savings while the “bubble” is still inflating with net inflows of new money. These ponzi dynamics help to explain why Labor so strongly supports lifting the superannuation guarantee to 12%, since this will ensure that net superannuation inflows continue to rise even as more baby boomers retire and withdraw their savings. Without the increase in the superannuation guarantee to 12%, fund outflows could exceed inflows, pulling money out of the system, deflating the bubble, and lowering everyone’s retirement nest eggs.
Thankfully, the chair of the Financial System Inquiry, David Murray, has warned the Morrison Government against bailing out the superannuation industry, claiming it would open up a ‘moral hazard’ and encourage funds to misbehave and take excessive risks with members’ money:
“Were they [the RBA] to provide liquidity they create a moral hazard in super system for the future and therefore they would have to consider whether the terms are suitably tough,” Mr Murray told The Australian. “Where trustees accept as precedent that in certain circumstances they can have access to this support, that in turn would lead them to make risk management decisions which are likely to be counter to members’ interests,” he added…
Clearly, a business that is based upon the mandated flow of every member’s pay should not:
- refuse to give it back;
- refuse to keep the lion’s share in liquid assets; and/or
- run out of money.
The fact that we have arrived at this point is illustrative of both gross mismanagement and system failure. Moreover, if some funds have gotten over-leveraged or invested too much in illiquid assets, then they should bite the bullet, sell assets, crystallise losses and fess up to members who will then judge them on their performance. David Murray is 100% correct. Giving superannuation funds access to the RBA emergency liquidity support does not make sense and will encourage ongoing reckless behaviour. Superannuation funds are not systemically important institutions. They are merely investment funds, some of whom misread the business cycle and regulatory risk, and over-extended themselves to feed fat bonuses. Let market forces sort the wheat from the chaff and dictate where members place their money in the future.
Apology and clarification.
An early version of this post made reference to industry super fund, Hostplus, freezing member redemptions, as well as an article in the AFR about recent changes to Hostplus terms and conditions that may result in a freezing of member redemptions.
The first assertion was factually wrong. Hostplus has not frozen any member redemptions.
Moreover, Hostplus has contested the content of the original AFR story as well:
Media reports published earlier this morning concerning Hostplus are misinformed and contain a number of incorrect statements.
Hostplus recently updated its Product Disclosure Statements in accordance with our program. This ensures alignment and uniformity (where appropriate) between Hostplus’ core disclosure documents.
Hostplus confirms that no amendment to the governing rules of the product has been made.
Alongside other superannuation funds Hostplus’ Trust Deed prudently (like others) empowers its Trustee with a broad discretion to suspend or delay unit pricing in extraordinary situations to ensure equity, fairness and balance in investment pricing and transactions in the best interests of all members.
In Hostplus’ case, this trustee power is not new. It is not unique. It is not exceptional. As part of its recent update, Hostplus highlighted elements of the Fund’s long-standing governing rules and discretions as these relate to investment pricing and transactions.
These are challenging times for our members. Misinformed media speculation unnecessarily concerns our members and it is both regrettable and misplaced.
The Fund remains committed to supporting the Federal Government’s Policy to allow members to access up to a total of $20,000 from their superannuation accounts over the course of the current and next financial year, to assist them
through the current crisis and has ample liquidity available to support members undergoing financial hardship.
MB apologises to both Hostplus and readers for mischaracterising the issue.