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Senator slams super funds racking illiquid assets

— 1 minute read

Liberal Senator Andrew Bragg has blasted superannuation funds who may have sunk too deep into illiquid assets ahead of the coronavirus crisis, calling it a “sign of bad management and poor investment governance”.

A reported 361,000 Australians have applied for an early release of their super under the government measure, introduced as part of the fiscal stimulus response to the coronavirus crisis.

Under the mechanism, Australians who have lost 20 per cent or more of their income and those who are facing financial hardship will be eligible to access $10,000 of their super, tax-free, before July and another $10,000 after July. 

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Treasury has estimated around $27 billion or 1 per cent will be taken from the $3 trillion super pool as a result, while Rice Warner has predicted almost double will be withdrawn as unemployment rises, pointing to a range of $40 billion to $50 billion. 

The actuaries consultant has also predicted the industry funds that cater to the hospitality, retail and tourism sectors will be most heavy hit by the withdrawals, estimating that the most significant impact will be felt by one-quarter of super funds, with 10 per cent of members to take their money.

But a number of super funds were reported to raise issues around liquidity in light of the measure, despite dismissing liquidity concerns due to their fund structure in front of a government committee in November. 

KPMG has said funds are set to see rebalancing challenges with illiquid investments and high sell spreads being introduced by managers. It has noted there will be a need for more out of cycle and more frequent unlisted asset valuations, as seen by the likes of Hostplus, AustralianSuper and IFM Investors.

Mr Bragg has criticised funds for voicing liquidity concerns saying the government expects the sector to be prepared and to have more than enough adequate cash flow to endure the market downturn and customers switching between funds and investment options. 

“Superannuation funds which may have overextended into illiquid assets, such as infrastructure and property and who did not retain adequate cash and other liquid holdings, did so knowing the risks they were adopting,” he wrote in a statement.

“The strong investment returns on illiquid assets [are], in fact, referred to as the ‘illiquidity premium’, a reward for the risk funds are willing to adopt when they buy these lumpy assets that are hard to sell. 

“To tout strong investment returns off the back of illiquid assets in the good years, only to come to the government cap in hand when markets inevitably turn, is simply a sign of bad management and poor investment governance.”

‘Members should be asking hard questions of their fund’s management’

Mr Bragg pointed to the opening paragraph of APRA’s Prudential Standard for Investment Governance, which requires a super fund to “have in place a sound investment governance framework for the selection, management and monitoring of investments”. 

The standard also mandates regular stress testing for different scenarios, with board oversight. 

“If prevailing market conditions require superannuation funds to sell assets at depressed prices, and therefore exacerbate poor investment performance, members should be asking hard questions of their fund’s management team and trustee board,” Mr Bragg said.

“The impact of the coronavirus on the domestic and global economy is clearly unexpected and severe. It should not give cover to super funds for imprudent practices. Attempts by funds to deflect criticism is simply abdicating responsibility for mismanagement. 

“Many people are losing their livelihoods and are struggling to buy the essentials. It is time for super funds to step up and help their members.”

 

Senator slams super funds racking illiquid assets
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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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