Hostplus CIO calls for liquidity window

Super funds should be allowed more illiquid assets

By Wouter Klijn
Wed 08 Sep 2010

Super funds should be allowed periods of lower liquidity levels to make better long-term investments, according to the Hostplus CIO.

Superannuation funds should be able to make use of a liquidity window to bridge short-term increases in illiquid holdings in order to make better investment decisions, according to Hostplus chief investment officer Sam Sicilia.

"It seems to me that superannuation funds are unnecessarily hamstrung in their ability to take on additional levels of illiquidity, especially given the fact that superannuation money is locked within in the superannuation system - members cannot take their money," Sicilia said yesterday at the annual Australian Super Investment Conference on the Gold Coast.

Sicilia argued that if super funds were to participate in attractive investment opportunities, such as Australian infrastructure projects and the expected offloading of assets by European governments, they should be allowed to increase their exposure to illiquid assets.

"The availability of a liquidity window would enable superannuation funds to invest over much longer time horizons," he said.
 
But super funds are restricted in their ability to offset illiquid holdings, partly because they need to hold cash to offset member investment choice liabilities.

"Conceptually, [a liquidity window] should permit member choice options, not just to be backed by cash, but also by future compulsory superannuation contributions, by rental income that comes from your direct property portfolio, by distribution income that comes from your infrastructure assets," he said.

"I can see absolutely no reason why we have to hold cash for member investment choice options. What we need to do is find mechanisms to transfer the value of the member's holdings in one option to another or between funds. It need not be cash, and a liquidity window would help offset that.

"I urge super funds to lobby for a liquidity window," he said.

But Australian Prudential Regulation Authority senior manager Kevin Dent, who also spoke at the conference, said there was no quick fix to liquidity issues and stressed the importance of scenario testing by funds.

"This is not an issue that you solve on a permanent basis. Funds need to constantly monitor their requirements," he said.

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