The coronavirus pandemic is causing liquidity problems inside superannuation funds, according to new research from consultants KPMG, and the Reserve Bank’s bond-buying program is too small to help.
The economic shock will also lead to higher fees and short-term changes to investment targets.
“Funds’ balances have fallen on the back of market shocks on listed and unlisted assets rivaling those of the GFC,” KPMG’s asset and wealth chief Linda Elkins said in a statement.
“The arrival of the COVID-19 era has thrown everything into the air in the super sector.”
Fund sustainability not in doubt
In the near term, the economic disruption triggered by COVID-19 will slash superannuation contributions by $700 million a month as unemployment kicks in.
That figure will reduce the average monthly contribution level from $9.9 billion to $9.2 billion, which although noticeable is not a significant loss.
“It won’t affect the sustainability of funds,” KPMG operations partner David Bardsley told The New Daily.
However, the early withdrawals of up to $20,000 per member suffering financial hardship “pose significant liquidity challenges and will put pressure on and test the investment governance frameworks of many, if not all, superannuation funds and platforms,” KPMG’s report found.
Funds will initially respond to those liquidity concerns by increasing fees to members.
“The traditional models will be affected and fees structures will start to look different,” Mr Bardsley said.
“The old model of $1.50 a week will change to more like $2.50 a week.”
AustralianSuper has already made that move and will be followed by other funds as the crisis unfolds, Mr Bardsley said.
Prime Minister Scott Morrison said on Friday that more than 1.29 million Australians have so far applied for early super withdrawals totalling $11.7 billion. (See bottom of page for APRA data.)
“At a portfolio management level, we have already seen a strain on liquidity, with portfolio managers finding it hard to sell their fixed-interest assets [such as bonds] to any buyer other than the RBA,” Mr Bardsley said.
And the RBA’s bond-buying program is not injecting enough cash into the system.
“As a result, we have seen a significant increase in buy/sell spreads, making it much more costly to rebalance portfolios,” Mr Bardsley said.
As the chart below shows, super funds are already starting to drain their cash reserves to fund early withdrawals.
And although the first tranche of withdrawals has totalled less than the government expected, Mr Bardsley said there would be a surge from July when the second tranche becomes available.
“Withdrawals will start again as reality sets in and unemployment increases,” he said.
APRA data shows the average withdrawal from major funds has so far been well below the $10,000 limit the government put on the first tranche.
Although the highest claim rate has been at Hostplus, where 12.7 per cent of members accessed the early access scheme, those withdrawals were the lowest on average.
Hostplus remains strong
The superannuation fund representing the hospitality industry rejected reports in the Australian Financial Review on Monday suggesting its balanced growth fund had greater liquidity risks.
A Hostplus spokesman told The New Daily early withdrawals had so far amounted to only 2.6 per cent of the fund’s value.
“Due to our successful long-term strategic and well-considered shorter-term tactical asset allocation strategies, Hostplus is in a strong liquidity position with approximately $6 billion in cash and highly liquid reserves, which greatly exceeds its anticipated early release requirements,” a spokesman said.
Meanwhile, Industry Super Australia chief economist Stephen Anthony said despite liquidity demands created by withdrawals “no industry funds have been caught short”.
“Our funds are strong and are able to meet the demands of this scheme under all scenarios, but this scheme is an upheaval of 30 years of bipartisan policy on preservation rules,” added Industry Super Australia CEO Bernie Dean.
Overall, the superannuation system is performing reasonably well through the crisis.
Research house Chant West found that the average balanced fund had gained 3.1 per cent in April as the sharemarket recovered, but was down 3.3 per cent over the 10 months of the current financial year.
“Remember that over 2019 the average growth [balanced] fund gained 14.7 per cent and average fund values were still above where they were at the start of 2019,” Chant West researcher Mano Mohankumar said.
Despite the coronavirus crash, fund performance was still above the target of the consumer price index plus 3.5 per cent over time, he said.
The New Daily is owned by Industry Super Holdings