by Alex Dunnin*
In an endeavour to calm down the speculation around the COVID crisis and super fund liquidity, Rainmaker Information compiled a tally of March investment returns from 15 MySuper products run by not for profit (NFP) funds that declare daily unit prices or daily crediting rates.
The results are that, in March, NFP super funds reported an average return of minus 9.0 per cent. Given what happened in the Australian and global equities markets, the results were quite reasonable.
As these are MySuper products they contain a mix of asset allocations but in the main they ‘balanced’ to ‘growth’. Since the February 20 market peak the average return up until end of March was minus 12.1 per cent. As troubling as these numbers are for people approaching retirement, compared to the ASX that fell 21 per cent in March and by 29 per cent between February 20 and the end of March, these superannuation results look relatively good.
The figures mean that MySuper products are currently sitting on an average rolling 12-month return of minus 3 per cent. It should be noted that during the GFC, the rolling 12-month MySuper index got as low as minus 20 per cent as at December 2008.
But we should also remind ourselves that it took super funds just two years to recover from the GFC and in the following decade superannuation boomed. In fact, the 2019 calendar year was one of the best on record. My point is that super has this uncanny knack of surprising us on the upside.
Liquidity in super funds
Rainmaker also did a tally of cash in the system, bringing together official figures from APRA, the ATO and the Future Fund. Here are the headline results:
- There is $946 billion in cash and bonds in superannuation.
- This is split $397 billion to cash and $549 billion to bonds.
- NFP funds hold 51 per cent of this, SMSFs 26% and retail funds 23 per cent.
- Note that the NFP 51 per cent share compares to their 51 per cent share of all superannuation assets, meaning it’s in proportion.
- SMSFs hold more cash and bonds than retail funds.
I include SMSFs in this because they are covered by the early release policy and law change albeit the details of how they will handle it are yet to be confirmed.
Retails funds hold 11 per cent of their assets in cash compared to industry that hold 8 per cent. Industry funds hold very similar allocations to bonds as retail funds, 20 per cent plays 21 per cent. As a result retail funds have 33 per cent of their assets in cash and bonds compared to industry funds on 28 per cent. This difference reflects the retail sector being much more dominant among older fund members being retirees. This is similar to the argument of the SMSF sector that it shouldn’t be judged for holding high cash levels.
This is why Rainmaker says there’s more liquidity in superannuation than we realise, which was the Government’s argument when it announced its early super release policy.
It should also be noted that the Treasurer Josh Frydenberg, in his interview on ‘Insiders’ on Sunday, April 12, said he believed that various ‘Job Keeper’ packages may result in not as many people as expected needing to access their superannuation so maybe not as much will be needed as first thought anyway:
- “Just over 600,000 already have indicated their interest in doing so. It’s important to note that when we announced the early access to superannuation tax-free that was before the Job Keeper package was announced. I expect the numbers that ultimately access it will be lower than maybe initially thought.”
- Here’s a link to the transcript
We also need to realise that it’s not the capital market falls that are the issue in the frenzy of speculation over super fund liquidity because super funds appear to have withstood that onslaught reasonably all things considered. It’s the forced hibernation of particular industries and the Government changing the early release rules, which I wager Governments never expected they would have to do, regulators had no warning of, much less super funds. To say funds should have seen this coming is disingenuous. And what should they have seen coming: the market correction, the Corona Virus or the Government changing the legislation on superannuation?
And it should be said that no super fund leader I’ve spoken to or who’s commented publicly has disputed the right of members in need to access super or the right of government to lead the nation through this crisis.
All they have said, as far as I’m aware, is that this process should be managed and that accessing superannuation early should be a last resort. I liken it to the bushfire crisis. We didn’t say to drought affected burnt-out farmers that you should have seen this coming and planned for it. We sent in fire crews, of which I was one as it turned out, to manage the fires and protect people and property. Then we sat down with them and helped them manage the situation. We still are.
This is why APRA refers to trustees having to prepare for reasonably expected events – there are statements on their website saying precisely this. A government suddenly recasting superannuation from a long-term investment to a short term one is BBS, beyond black swan. There is no rule book for this. APRA, which just a few months ago was hitting funds with their heatmap and comparing them against aggressive asset allocation mixes has suddenly transformed into the liquidity cops. That’s how massive and fast this transition has been.
But APRA’s job is much bigger and they may soon learn what it means to be an independent prudential regulator. The term ‘Separation of Powers’ is one I’m expecting to hear a lot more of in coming months.
While the government has said they have been told by Treasury that up to $27 billion could be accessed by super fund members across Australia as part of the early release of super measure, and that it’s only about 1 per cent of the system so should be manageable, this assumes all funds will be equally impacted. Initially many in superannuation thought this measure would impact funds with young members or lots of low account balances but on reflection this view is simplistic. This is because these accounts in reality are a very small share of those funds’ assets.
We simply don’t know how this will play out and folks should stop speculating. Most of the hot-headed comments seem to infer it’s going to be an industry fund problem. But many retail funds have similar distributions of young members and those with low account balances. Moreover, the February investment returns data shows retail super was worse hit by the beginning of the CFC – the Corona Financial Crisis – than NFP funds. I would encourage superannuation’s tribal warriors to dial down the rhetoric, think of the national interest and show wisdom. That is, be fiduciaries.
Should liquidity smoothing mechanisms be necessary it would actually be quite simple to design a range of solutions. For example, we have the Future Fund sitting on the sidelines with $37 billion in cash and bonds. The Future Fund has been noticeably absent from any public discussion on the COVID response. I’m sure they would welcome any opportunity to play a constructive economic role. Let’s remember they aren’t a super fund but a fiscal fund with just one stakeholder, the national government, so have much more flexibility than do superannuation funds.
But it’s too early to say if any of this would be needed. Superannuation fiduciaries thinking about these issues now should not be criticised for it, they are just doing their job and planning for future possibilities be they good or challenging. If such planning annoys a few politicians, so what.
According to APRA figures, APRA-regulated super funds hold $188 billion in unlisted property and infrastructure. This is split across $103 billion in unlisted property holdings and $86 billion in unlisted infrastructure holdings. Holdings of these unlisted assets are much smaller than holdings of cash and bonds.
While NFP funds hold on average more unlisted assets than retail funds, retail funds hold more equities. It’s swings and roundabouts. This is why we say it’s too early to say how this will play out.
Indeed, a retail fund may hold its property in a listed trust. But this listed trust’s assets are still real and actual properties. These will be subject to the same devaluation forces as regular unlisted property, so it’s not as simple saying that a super fund with unlisted property is more vulnerable than one holding these same assets in listed form.
And let’s not forget, that the Future Fund holds 13% of its assets in property and infrastructure as well. No one criticises them for doing this. Indeed, most of the professional valuers that value the Future Fund’s property and infrastructure portfolio are the same ones who value the property and infrastructure portfolios of industry super funds.
The biggest irony is that super funds are usually criticised for not investing enough in national infrastructure. But today they are criticised for it. In a few months they will be criticised for not pouring money into helping rebuild the Australian economy with their investments.
Further to the total numbers the government outlined regarding its early release of superannuation COVID policy initiative, it’s becoming clear that this measure inadvertently impacts young fund members much more than older members.
My logic is that the younger you are, the bigger hit on your balance due to taking out potentially $20,000. For example, if you are 60 years old when you take out the money you reduce your balance by just 3 per cent, but if you do it when you are 30 you are taking 65 per cent of your super balance away. The impact on what’s left in your account to earn compound interest is huge.
No-one is saying people in financial distress should not be able to access their super. But the unintended consequence is that the policy measure hits young people very hard.
Given superannuation is already massively tilted in favour of older and generally wealthier people than it is for younger people, this fuels the view than once the pandemic is over it is young people who will be the ones carrying the can. And this is even before we get into the idea that young people are the ones who will be the ones paying off the COVID national debt for decades to come.
*Alex Dunnin is an executive director and head of research at Rainmaker Information.