Australia superfund withdrawals: Double trouble

Australia’s pension system is the fourth largest globally with nearly A$3 trillion ($2 trillion) in assets at the end of last year. However, making long-term commitments to private capital has always been a challenge. Between 2013 and 2016, Australia’s average allocation fell from 12% to 4% despite the asset class outperforming all others. And there it remains.

While only a temporary measure intended to support those most affected by the coronavirus outbreak, allowing members early access to retirement savings is unlikely to benefit private capital. Between now and September, people who are unemployed and on benefits or who have experienced a sharp income drop as a result of COVID-19 have two opportunities to withdraw up to A$10,000 tax-free. Nearly A$4 billion has been paid out so far to 456,000 applicants. It is estimated that the overall total could fall in the A$30-50 billion range.

Not all superannuation funds will be impacted equally. As the provider of choice for many working in the hospitality and tourism industries, Hostplus’ members are among the hardest hit. About 7% of its membership has applied to withdraw money so far, compared to 4% at AustralianSuper, the country’s largest superannuation fund. However, any fund with an older demographic, and therefore lower cash inflows from contributions, could come under pressure if members decide to withdraw.

This initiative – necessary though it might be – represents a liquidity issue on top of a liquidity issue. Like many of their international peers, some Australian pension funds may find themselves overallocated to private equity as a result of sizeable declines in public market valuations. They don’t know when the next distributions are coming, and they are keen for any information on the performance of managers’ existing portfolios to get a sense of the likely capital call schedule.

On top of that, Australia has more defined contribution (DC) plans than any other major pension market. Compared to defined benefit (DB) plans, they are more portable, more subject to the whims of the individuals they serve, and more inclined to invest in liquid assets. Indeed, Australia allows members to move their pension savings between providers.

These factors have increased uncertainty at the expense of flexibility. Speaking to AVCJ last week, one investment manager with a superfund was not optimistic about withdrawn but unused money being paid back in once COVID-19 passes. His represents one of several groups that has written down unlisted asset valuations. This was done in the expectation that marks will be down when they come in and with one eye on portability – the super funds don’t want the delay in reporting versus public markets to disadvantage members who leave money in their super rather than withdraw it.

The pandemic will ultimately abate, and the superannuation industry will return to a version of normal. But has COVID-19 set a worrying precedent, whereby members would be able to dip into their pension savings whenever there is an emergency? This hardly encourages long-term investment in illiquid asset classes.

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• Topics
• Australasia
• LPs
• Australia
• covid-19
• coronavirus