The Threat to Superannuation
At the first emergency session of Parliament two weeks ago, legislation was passed allowing people who lost their jobs or had a decrease in their income of 20% or more, to access $20,000 of their superannuation, $10,000 immediately and $10,000 next financial year if this is necessary.
This has brought a strong response from the industry super funds who have argued that it will disadvantage both the workers and the funds. Former Reserve Bank Governor and industry funds director, Bernie Fraser, argues that superannuation is designed to give people a retirement income and removal of $20,000 worth of capital would put a big hole in their retirement benefits.
Former Superannuation Minister, Nick Sherry, has pointed out that superannuation funds currently face a triple threat to their current operations: higher unemployment is reducing the contributions into super funds; the volatility in the stock market has led to a flight from equities on the part of members; and the applications for cash will stress the liquidity of some funds.
On Monday, ‘The Australian’ carried a story that 360,000 people had applied for the cash payment. This is a 4000% increase in early draw downs. Nick Sherry says that there is a risk that one or more funds could have a liquidity crisis because they do not have enough liquid assets to meet the demand for cash. The chairman of the construction industry super fund, Cbus, former Victorian Premier Steve Bracks, has proposed that the Reserve Bank provide the funds with ongoing liquidity to get them over the hump.
Cbus is an example of a super fund that holds a large portfolio of illiquid assets because it invests in property as a way of promoting its own members’ interests. There has been criticism from some commentators that this limits its capacity to respond to crisis situations like the present one, where members need to access cash from their funds.
Another criticism is that the fund is not properly valuing its property portfolio. Tim Wilson, the Chairman of the House Economic Committee, has pointed out that property investment companies have devalued their portfolios by a much bigger degree than the superannuation funds. This points to a long-term risk that working from home will become the norm and the demand for CBD office space will decline sharply. In this case Cbus may have to substantially devalue its portfolio in the future.
This casts into doubt proposals by experts like Kevin Davis, Professor of Finance at Melbourne University that the Reserve Bank should lend money to superannuation funds to maintain liquidity, with the funds repaying it later when the economy recovers. There has to be some question over the capacity of funds to repay if they don’t have the right asset mix.
On the other hand Professor Davis argues that the loans would be low risk.
"Given the current ultra-low level of interest rates, and with strong collateral making the repo loans virtually risk free, that is not unreasonable in the current troubled times," he claims.
It is obvious that the Reserve Bank will have been doing due diligence on the superannuation funds to ensure they have the capacity to remain viable and repay the loans but there is no doubt that many superannuants will be concerned about their retirement savings.
Given the level of public doubt it is not unreasonable that a public enquiry should be held into the administration of the superannuation funds including an investigation of their investment policies and the conduct of their trustees.