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COVID-19 stress testing super governance, consulting giant says

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The coronavirus pandemic is stress testing the robustness of governance structures, clarity of internal accountabilities and crisis management plans of superannuation funds in real time, a financial services consulting giant has said.

Funds are set to be hit by two measures in the government’s second stimulus package: early super release, allowing members up to $20,000 tax-free and retirees being able to reduce their pension or annuity drawdowns by up to 50 per cent. 

KPMG has reported the newly enacted measures, along with extreme market volatility and inevitable increase in unemployment (including from overseas operations) arising from the crisis will impact all areas of super. 

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Despite estimates from Treasury and the Actuaries Institute placing the withdrawals at a total of around $27 billion and $25 billion respectively, Rice Warner has forecast the raids will reach up to $40 billion to $50 billion as unemployment rises. 

KPMG has estimated 1.65 million members may seek early access. 

Linda Elkins, head of asset and wealth management at KPMG said super funds will be impacted across three areas: administration and operational effectiveness, investment governance and insurance. 

More resources needed for demand

In administration and operational effectiveness, KPMG has pointed to challenges including the implementation of newly enacted measures with access to tax-free early payments needing to be built. 

Funds also face a surge in call centre volumes and need for information while still complying with financial advice limitations and increased member switching and early access payment processing, all while still needing to accelerate remediation payments. 

Ms Elkins has suggested companies will need to increase resources to help review and manage the implementation of system and process changes as member demands become more complex. 

She noted funds will also need to do reviews across business continuity plans; providers, offshore and outsourced providers; remediation activities and fund programs. 

Additional training, support and scripting alongside additional controls have been suggested for call centre employees, with members needing uplifted general advice outcomes.

Liquidity

In investment governance, there are concerns that funds’ liquidity will be affected, with further market volatility, increased withdrawals and switching and reduced inflows from superannuation guarantee contributions. 

Funds are set to see rebalancing challenges in light of illiquid investments and high sell spreads being introduced by managers. KPMG reported there will be a need for out of cycle and more frequent unlisted asset valuations.

There will also be effects from market losses on deferred tax assets (DTAs) and their treatment in unit pricing to achieve member equity (such as DTA capping).

Funds’ ability to make efficient and quick investment decisions could also be handicapped. 

Ms Elkins has recommended reviews across investment governance frameworks, current liquidity positions and scenario testing. She added companies will need to undertake fund demographic and financial modelling, alongside stress testing for cash flows, revenue, costs membership and assets.

Rise in disability claims expected

KPMG also expects there will be an increase in insurance claims related directly to the virus, along with the rise in unemployment giving way to an uptick in disability claims (total permanent disability and income protection), particularly around mental illness.  

However unemployment may expose members to restrictive TPD definitions or reduced IP benefits.

Further, it anticipates early access payment will cause upward pressure on insurance premiums, increasing account erosion. 

Ms Elkins has said funds will need to review and update their insurance product offerings, their claims management processes and resources, as well as assess and model the erosion impact of default arrangements.

 

COVID-19 stress testing super governance, consulting giant says
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Sarah Simpkins

Sarah Simpkins

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].

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