Industry superannuation funds scream “sovereign risk”

Industry superannuation funds claim the Morrison Government’s early release policy has raised “sovereign risk” and will hamper returns in the future:

“Clearly the government has changed the rules and super funds now need to factor in sovereign risk [the danger of governments acting precipitously],” [HostPlus CEO David Elia] said.

“That means funds will carry higher levels of cash, resulting in lower returns.

“We will be less aggressive in terms of the allocation of funds to [the venture capital] sector and that applies to all asset classes”…

“Simply by virtue of [the government intervention] … we will see lower returns across the sector. I think that’s the significant conclusion you can draw,” he said.

However, David Knox from Mercer has played down the impact of the early release policy, claiming that “total funds withdrawals have been just over 1 per cent of funds under management”:

“Some funds will have seen withdrawals of more than that, with HostPlus experiencing around 2.5 per cent,” Mr Knox said.

“But even 2.5 per cent is not a big issue as far as liquidity goes”…

“I’m not sure all funds will have to hold more in cash, but some might,” Mr Knox said.

In any event, requiring superannuation funds to hold more liquidity would be a good result. Industry superannuation funds have leveraged too heavily into illiquid unlisted assets like ports, toll roads and airports, as well as private equity funds.

While this has allowed them to trade on a so-called “illiquidity premium”, thereby delivering better returns over both the short and long-term, it has also raised risks, as we have witnessed recently.

It is also rather galling to see industry funds complain of “sovereign risk” when government policy mandates that workers must direct 9.5% of their wages into superannuation, thus ensuring ever-growing funds under management:

Few other industries in Australia receive such generous government support.

Unconventional Economist
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Comments

  1. It’s funny. I never heard them shout “sovereign windfall” when Howard changed the rules in the favour of superfunds.

    • Agreed. But the real scandal is that these funds can’t even handle 1% withdrawals without bleating — in funds management terms that’s willful negligence.

      • Yes. I’ve been saying for a while that any fund in Australia could lose all their FUM within 30 days because of portability requirements. The fact that they are screaming over the loss of 1% with a month or so’s notice makes them look incompetence.

        Time for a clean out in the RSE ranks I reckon – they are too lazy. Time for APRA to step up.

        • These industry funds in particular need to be brought to heel — I have zero doubt that there is a heap of member cash being spent on:
          1. Mates projects (all sorts of back-handers involved)
          2. Projects whose true value is lower than the price paid by members.

          In the years to come it will be exposed as a festering pit of corruption. But the perpetrators won’t feel bad cause ‘the taxpayer will provide a bailout’.

  2. “Industry superannuation funds have leveraged too heavily into illiquid unlisted assets like ports, toll roads and airports, as well as private equity funds”

    I’m not sure what you’re trying to achieve with this. Who do you think will end up owning that infrastructure if superannuation money doesn’t ? It ain’t gonna be held in Australia, that’s for sure.

    I get your beef with tax concessions, lazy fund managers overcharging, and the associated ticket clippers, but I don’t see what happens in your alternative scenario other than consumption on services and imports increasing, plus Australians actually owning less and less of their country’s assets than they otherwise would.

    The neolibs’ attack on super is really a proxy attack on unions. You’re doing a great job of helping their cause. just not sure to what end.

    And imperfect as they are, associations like unions are what stands between having any hope of democracy and a complete corporate plutocracy.

    • What is this obsession with Australian retirees being invested in Australian infrastructure? It’s irrelevant. Retirees’ money should be invested in the best investments, with the best risk-adjusted returns — it doesn’t matter whether those investments are in the Congo or on the moon.

      The truth is that a LOT of Super investments in domestic infrastructure are likely sh#t investments, bought at the wrong price, under highly dubious circumstances. Anyone with an ounce of investment nous should be managing their own Super or using an outfit like Nucleus Wealth, who at least acknowledge the short-comings of the Industry Super set-up. Members of Industry Super funds are in for an incredibly rude shock in the their retirement years (current retirees are creaming it obviously).

      • There’s something to be said for self-efficiency and investing in assets that increase OUR productive capacity. There’s more to an investment than just the return; building it creates positive externalities in that community (as long as it isn’t a highly polluting piece of infrastructure like a coal mine or an airport using fire fighting chemicals which probably cost the community more than the benefit).

        • No problem with the underlying sentiment but every individual should choose either way — forced collectivism is little more than tyranny.

          What you’re saying is that it’s fine for Super members to pay $100 million for an asset that’s realistically worth $80 million, because ‘collective good’. Each to their own – but not for me, thanks.

  3. I agree with the super funds. They were acting rationally in the interests of their members given known knowns and have been blind-sided by government sh!tfvckery which has disadvantaged their members substantially

    • Yes and no. When you manage money you’re being paid to manage risk — these managers have assigned ‘sovereign risk’ a probability of zero. And are now finding out that they were wrong. People who get it this wrong should be sacked, for exercising bad judgement. It’s that simple.

  4. it’s not THEIR FK N MONEY, it’s the clients.
    fkn seagulls the lot of them

  5. Jumping jack flash

    “…workers must direct 9.5% of their wages into superannuation, thus ensuring ever-growing funds under management.”

    And not only that, the ponzi has strict rules around accessing those funds to ensure ordered access which means that the ponzi-like behaviour can go on for quite some time and it will possibly never collapse. It is ensured that the first into the ponzi are the first to leave and there is a reasonably fixed period of investment where funds cannot be withdrawn. This ensures maximum rewards for those cashing out, garnered from all those who are forced to sacrifice 9.5% of their incomes to it in the meantime.

    If old Bernie’s ponzi had the same rules then I’m sure that it would still be kicking around earning massive returns for investors as well.

  6. Foregone wages and salaries under FORCED contribution, Who better understands an individuals or household needs in dire times better than themselves. Its a Ponzi. Any person should be able to withdraw any amount at any time and pay said taxes. No grovelling to access ones wages ever, Whats one of the golden rule of investing in markets–never invest more than you can afford to lose. The legacy issue from the 90s still exists whereby companies can still withhold super contributions from employees up to three months before committing- 12 weeks accumulated funds. So it doesn’t matter that your weekly /fortnightly pay slip states contributed xyz to super your super fund only gets money on a quarterly basis to deploy yet your pay slip shows super contribution weekly. And the question on this is if Im payed electronically per week why cant my super wages be dropped in at the same time?
    Show me MY MONEY and its available 24/7/365 no questions asked. No having to rovide proof of any kind, Your wages and you are willing and oblidgied to pay tax. So Fn what?