The Reserve Bank of Australia (RBA) has flagged the growing importance of the country’s super sector to financial system stability due to both its size and its connections to banks.
As of June 2024, the sector was managing nearly $4 trillion of assets, equivalent to around 150 per cent of GDP and 25 per cent of total financial system assets.
The central bank noted that the closed nature of the superannuation sector, with its long-term investment horizon and limited leverage, helps to mitigate systemic risks.
But as the sector now accounts for one-quarter of Australia’s financial assets, the central bank warned that its significant growth, rising connectedness with banks and increasing footprint in financial markets creates new risks, including the ability to amplify shocks.
“The value of assets managed by superannuation funds doubled in the decade to 2024 and is expected to continue to grow faster than the overall financial system,” the RBA said.
As the superannuation sector has grown, the central bank said its financial ties to the banking system have intensified, with funds holding nearly one-third of bank short-term debt securities and over a quarter of bank equity, which could amplify financial shocks if their investment actions become correlated during market stress.
“A recent illustration occurred during the onset of the pandemic in Australia when superannuation funds increased their sale of bank debt securities back to issuing banks, adding to bank funding pressures – which in turn increased funding costs across the financial system,” the RBA said.
Thomas Dutka, director of manager research at Morningstar, told InvestorDaily that mandatory contributions are driving fund flows, enabling them to outpace the broader economy.
Australia’s largest super fund, AustralianSuper, has already flagged an ambitious target of $1 trillion in assets in the next decade.
“[Super funds’] impact on the economy is growing, so that obviously is going to increasingly present risks,” Dutka said, without wanting to elaborate on the gravity of that risk.
He, however, noted that larger funds divesting stocks could have a significant impact on price, while multiple funds simultaneously divesting the same stock could cause “a lot of problems”.
This was also raised by the RBA, which said: “Unexpected liquidity calls – including capital calls on private asset exposures, abrupt policy shifts or margin calls on foreign exchange hedges – could lead to synchronised asset sales in some domestic markets as funds attempt to raise cash quickly.”
However, Dutka also highlighted that the large scale of most funds means they tend to be less active in managing their equity investments.
“It’s not like steering a speedboat, it’s more like a super tanker,” Dutka said.
“They’re not trying to make a lot of active, high turnover trades, or take those sorts of positions, because it’s just not that easy to do.
“So it is a risk but there are also constraints that can potentially mitigate that.”
Mitigating this impact, according to the RBA, begins with continued efforts by funds to strengthen their liquidity risk management practices.
As super funds invest more in foreign assets, managing liquidity demands from currency fluctuations will also become crucial, the central bank said. Additionally, as more members retire and start withdrawing funds, the sector may face challenges with cash flow.
“The management of liquidity risk will require ongoing vigilance, including in respect to margin calls on foreign exchange hedges,” it said.
However, the RBA noted that any changes are expected to happen gradually, adding that the Australian Prudential Regulation Authority has already tightened standards to enhance liquidity management in funds.
“APRA now requires a greater degree of sophistication in liquidity risk management practices across the sector,” it concluded.
