A financial services consultancy has estimated the early superannuation release measure will drain the industry of $40 billion to $50 billion, as unemployment rises amid the coronavirus crisis.
The measure as part of the government’s emergency fiscal stimulus, will allow individuals in financial hardship to take out $10,000 tax-free from their super before July, and another $10,000 in the following three months.
Individuals who are unemployed and who have lost 20 per cent or more of their income will be able to take advantage of the mechanism.
Rice Warner has almost doubled a previous estimate from Treasury that up to $27 billion will be withdrawn from the system, approximately 1 per cent of all assets held in super.
The consultant has said with increased job losses rolling out across the country, the early super raid will see total withdrawals in the range of $40 billion to $50 billion.
Westpac chief economist Bill Evans has forecast unemployment will hit 11 per cent by June.
The Actuaries Institute on the other hand, estimated demands for early super could hit $25 billion, if 1.35 billion Australians each accessed the full $20,000.
The impact of the early super release, the Rice Warner analysis said, will vary from fund to fund, particularly for industry super funds centred around the tourism, retail and hospitality sectors, which have been slugged by the pandemic lockdown.
For the funds that will bear a disproportionate share of the impact, they are set to pay out large unplanned benefits, resulting in members capitalising investment losses, rather than waiting for a market rebound.
It is feared many members will not make up the withdrawal later, resulting in retirement benefit losses as large as $120,000 for a 20-year-old, as projected by Industry Super Australia.
SuperRatings made a calculation using ASIC’s MoneySmart calculator with a growth option with an assumed investment return of 5 per cent before fees and taxes on earnings, $20,000 out of a 35-year-old’s account over the next 12 months will forego around $80,000 in future benefits.
Many members with small balances will also exit the fund completely and the cash flow from superannuation guarantee contributions will be significantly knocked from the substantial job losses, Rice Warner said.
The withdrawals are also warned to reduce cash for reinvestment in assets with depressed market prices.
For an estimated 25 per cent of funds that will lose up to 10 per cent of their members, Rice Warner commented a reassessment of cash flow, liquidity and asset allocation will be critical.
Further, it warned members exiting their funds will forfeit their life insurance.
Actuaries Institute chief executive Elayne Grace commented: “We know large parts of the community have insurance through their super fund. We want people to have access to their funds, to help them through very difficult times, but it is important to know and map the consequences.”
“The Actuaries Institute would encourage the government to commit to restoring and maintaining the integrity of the retirement income system after the crisis ends.”
ATO needs to smooth process: Actuaries Institute
The Actuaries Institute has called for the Tax Office to step in saying the ATO, which would be making the determinations for early release, could distribute payments and invoice super funds, ideally spreading the impact of the withdrawals over time.
Tim Jenkins, convenor of the Actuaries Institute’s superannuation practice committee said: “There may be a need for the funds and the government to look at ways to enable early access and smooth out the ability and capacity of funds to pay,” Mr Jenkins said.
“A possible solution is for the ATO, in addition to making the determination, to distribute the payments to further streamline the process to get money into the hands of those in need quickly,” he said.
“The ATO could then invoice the superannuation funds over the following few months to spread the cash flow impact on funds.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].