Industry Superannuation funds caught naked on liquidity

One month ago, Australia’s industry super funds were begging for a “liquidity backstop facility” from the Reserve Bank of Australia (RBA) after the Morrison Government announced that it give cash-strapped Aussies early access to $20,000 of superannuation savings:

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.

This approach was strongly rejected by David Murray, who chaired the 2014 Financial System Inquiry, on the grounds that it would create a ‘moral hazard’ that incentivises super funds to manage risks irresponsibly knowing they will be bailed-out:

Assistant Superannuation Minister, Jane Hume, also claimed the industry fund’s demands for a liquidity backstop were evidence of “structural weakness… that has been hiding in plain sight” in relation to their over-exposure to illiquid unlisted assets.

Yesterday, more evidence of the industry super funds’ liquidity problems came to light, with The AFR revealing that industry funds sent the Morrison Government a letter demanding the Australian Tax Office (ATO) pay applications for early release:

The superannuation sector privately lobbied the Morrison government to force the Australian Taxation Office to pay early release applications in a model that would have delayed relief payments by “several months”.

A letter sent by super lobby groups to Treasury and senior regulators on the first day of operation of the $30 billion early access scheme argued that the sector had been put in an “unenviable position”…

Several super funds privately expressed concerns that their administrative systems would not be able to handle the expected flood of redemptions, and were pushing for the ATO to pay out members and bill funds for the drawdowns.

To date, just over 900,000 superannuation members have applied for around $7.5 billion in early release payments. This is a drop in the bucket against the circa $2.8 trillion superannuation savings pool that existed at the end of 2019:

That said, industry funds have been hit especially hard, suffering triple the withdrawal rate of retail funds due to their younger member bases in industries heavily impacted by the COVID-19 shutdown.

This has been made worse by these same industry funds having overweight exposures to illiquid unlisted assets like infrastructure and property.

While these unlisted assets have allowed industry funds to boost long-run returns via an “illiquidy” premium, it has also left them short of liquidity in the wake of the COVID-19 economic shock and the Morrison Government’s early release policy.

Unconventional Economist
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Comments

  1. thomickersMEMBER

    truly awful. one of my mate’s did early release from Australian Super on April 22. Still hasn’t received any money. It’s also very hard to log in he says.

    • Get him to call up – just make sure the the phone’s on charge while he waits to be seen to.

    • My application took a total of 12 days from 1st step to funds in bank. ATO moved very quickly and approved me within hours, fund was very slow to acknowledge ATO contacted them (told me 3 days after ATO notified me they’d told my fund).

  2. The Australian super mandate – (pension tax so future governments can deny their social obligations in pensions & aged care) – is finished.
    Australians – first chance they got – lined up to take their money out.

    A couple of salient points.

    1. Firstly the whole aging – inter generational burden in the future has been exposed as a total lie.
    Australia ranks in the middle of the OECD in the age pyramid demographics and we have one of the higher workforce participation, taxes paid and lowest costs of aged care current and projected outlays of all ORCD countries.
    There was never any justification for raising the retirement age, forcing a mandated super pension tax on every worker or raising the compulsory % of contribution.

    2. Yes it may be 3 trillion in super funds but that is split into 4 main segments.
    Here I will focus just on industry funds.

    🔹DYI super – heavily indebted into Australia property and a time bomb ready to explode once the housing market (rents and valuations) collapses.
    🔹Retail super
    🔹Corporate super

    🔹Industry funds
    The industry funds have both a very high concentration of workers now unemployed (hospitality, leisure, wholesale, retail) and over 1.2 million TR migrants with albeit low balances (their ‘legal job’ in addition to their illegal cash in hand income).

    Matheus Corman – in the Senate debate on job seeker and job keeper.
    “The (2.5 million) TR are not Australian citizens or PR..
    Their conditions of visa entry is that they have sufficient funds. They can access their superannuation if needed.
    Otherwise they need to exit Australia.
    They need to go home”

    If 1 million or more TR migrant guestworkers exit Australia they are entitled to fully withdraw their entire Australian superannuation. Permanent exit rules.

    That’s potentially 3 million or more (1.5 million newly unemployed Australians, plus say 1.5 million or more of the TR migrants – withdrawing their super.

    Primarily from the Industry funds.

    3.5 million x $20k balance withdrawal is $70 billion.

    The industry funds are about $700 billion (or less now on revaluation as their main investment – commercial property is empty or no rent so massive write downs

    And they only have $105 billion of liquidity.

    https://www.superannuation.asn.au/resources/superannuation-statistics

    Industry funds
    11 million members
    Only $771 billion
    Overweight in unlisted property.
    Only $115 billion in cash / liquidity
    1.7 million members x$20k withdrawal
    $34 billion or 5%
    3.5 million members (TR migrant guestworkers exodus) x $20k withdrawal = $70 billion.
    They hit the wall. Massive sell offs of unlisted assets at firesale prices dragging down the members values who don’t exit.

    And a general observation.
    Source: APRA Annual Statistics, December 2019.
    Around 16.7 million Australians currently have a super account.
    Benefit structure (funds with more than four members)
    Source: ABS 6523.0
    Source: APRA December quarter 2019.
    *Number of MySuper products: 97, 35 lifecycle.
    Projected superannuation assets
    Source: Assorted forecasts, Treasury MARIA model and Cooper Review.
    Investment returns to 30 June 2019
    Characteristics
    Age & Gender Mean $ Median $
    Males 15+ $168,500 $65,000
    Females 15+ $121,300 $45,000
    Males 25-34 $100,300 $31,600
    Females 25-34 $69,300 $20,000
    Males 55-64 $332,700 $183,000
    Females 55-64 $245,100 $118,600

    Cost of living per annum ABS single $44,000
    Average number of years super can provide income. (Excludes debt repayment – an high ratio of Australians over 65 btw are in major net mortgage or other debt).
    👉🏻Male 7.2 years.
    👉🏻Female 4 years.

    Yep – after 2 decades of forced pension tax – the average Australian male at retirement has at best only 7 years worth of income… and that doesn’t count the fact that the average Australians at 59 is in net debt so many once they get their super have zero and if unemployed are immediately forced onto welfare.

    The entire super system failed its first real test.

    A parasitic wealth / super / life industry sucking out billions in fees & hidden charges.

    The whole rotten lump misdirected into Australian equity, Australian cash, overseas equity and illiquid commercial & property trusts. All way down.

    They lost your money every which way they could and took fees for doing it.

    And now block Australians trying to get it back when needed.

  3. fitzroyMEMBER

    Trying to get money out of Legalsuper without success. Apparently I don’t know my own birthday.

  4. jgmellMEMBER

    The problem as I see it is Super has had very predictable outgoings. They know everybody’s birthday therefore they know when they are going to draw down. They managed investments accordingly.
    They sure as sh1t didn’t know Recessionberg and Scotty from Marketing were going to let people take a chunk out.

    • The Penske FileMEMBER

      I actually feel a little sorry for the fund managers here. As a quasi bush fund manager myself it’s hard to be given a set of laws (L – A – W) to work to and then have the goal posts moved. I actually have no time for some of these “investments” and if anything does come out of it for the members it may be terms in super such as “balanced” might be questioned. A few of my mates have questioned me over the past month or so after seeing their portfolios shrink.

    • MountainGuinMEMBER

      The same could be said for most occupations being hit by covid. Many of us have had to change our approach to cope.
      But in relation to super, sure unexpected and large drawdown are a large challenge, but if you are managing billions and charging large management fees, you should have a plan for a large economic hit that triggers large amounts of hardship withdrawals. Its is a low probability outcome, but given our debt levels, it has always been a real possibility.
      Rather than asking for ATO bailouts, funds just need to be honest that due to their chosen asset structure, withdrawal rates will be slow to prevent the fire sale of assets that are against all members interests. If the Superfunds have been clear in communications that they are overweight in illiquid assets then members should already be clear that their funds have chased higher returns with a liquidity trade off.

      • This – many funds do scenario modelling incl Black Swan type events and they hold their assets accordingly. I know of a handful of funds where the current drawdown requests are not even on the extreme end of the scenarios. I get it that everyone else is asking for a bail out but that doesn’t make it right. They were paid the big bucks to manage for this and they put short term self interest ahead of their responsibility as fiduciaries.

        • And in any case, in the era of fund portability, any fund could lose its entire investor base with very little notice.

  5. Or, they are being good managers and trying to limit the downside for the rest of us. Every other wanker is demanding help even foreign submarine builders

  6. It’s hard to see what alternative approach you are suggesting here.

    No way funds could have foreseen a dramatic change in policy like that. They have been allocating risk based on consistent patterns of inflows/outflows, mandated by government.

    If they had been holding higher levels of cash for the past three decades, they would have only been hurting all members and failing in their duty of custodians of people’s future retirement income.

    If they are forced to sell down risk assets now at this time to fund redemptions and re-balance, it hurts all members.

    For all of its shortcomings, the super system is only responding to government policy. Not sure why it has to be the whipping boy for bad policy decisions.

    • Sorry pig – I was concocting a reply and had to leave in the middle of it so I didn’t see what you had written when I posted. Yes- People, including Funds, have just followed policy. Policy has been no savings and invest in Real Estate in whatever form. I was just too stupid – fighting against the tide.

  7. Ok Given the repression of interest rates guess what happens????? But sure ‘Lower the rates; is the answer to all financial and economic ills – I mean seriously – what bunch of morons actually dream this crapola up?
    Funds would be irresponsible to hold large amounts of cash or cash equivalents. Cash is negative earning in a big way. I can’t remember exactly but, back in time, funds had to hold a large proportion of funds in cash or cash equivalents and Commonwealth bonds.(I think 30% or thereabouts) (Unfortunately I haven’t been a Real Estate Agent or a Fund manager in my life) This 30% is now impossible given IR’s have been forced to wayyyyy negative RAT rates – probably in the vicinity of – 7 to 10%. Sensibly, nobody has any savings!!!!
    The outlook is dark and gloomy because the sky is full of chickens coming home to roost – Gerard Minack

    • Kick the roost down the road and hope the chicken’s wings get tired.

      Modern mangement 101. I have never, in my working life, ever seen any manager nor exec ever actually fix any serious problem directly. Ever. We are an accountability free society in all the jobs where it really matters.

      This is why we are meant to have markets, uncomfortable as they sometimes are. History shows humans can’t be trusted to run their own show, over and over again. Someone has to fail occassionally and get cleaned out.