When the Australian government announced its Covid-19 Early Withdrawal Scheme for the superannuation sector in March, some of the warnings about the impact it would have were dire.
As well as the implications for individual members, one early estimate suggested that as much as A$65 billion ($45 billion; €40 billion) could be withdrawn from the system as a whole.
But assistant minister for superannuation Jane Hume told the ABC in April: “The government expects around 1.6 to 1.7 million Australians will apply for early release of superannuation and that will equate to about A$27 billion to come out of the system.”
The actual impact looks like it will be pretty close to that government forecast and Hume was keen to defend the scheme in an interview with Infrastructure Investor, arguing that the level of withdrawals have been “very much” in line with what the government expected.
“The funds have been terrific, they’ve been very responsive,” she said. “At the beginning, they were concerned there might be something of a rush on [withdrawals], and certainly the programme has been well received and taken up, but it seems to have been a manageable process.”
Hume said she understands why there were some concerns about the scheme early on, which was announced without formal consultation with the superannuation sector, but points out there have always existed provisions for members to access their superannuation accounts early at times of financial distress or on compassionate grounds.
“There’s a lot of discretion [in the existing provisions] and withdrawing money isn’t something that’s done often or easily. With this programme, we redefined the criteria but limited the amount that could come out,” she said.
“No one quite knew how it was going to play out. It was very hard to forecast, because we didn’t know how long or deep the pandemic was going to be in Australia at the time. So there was natural hesitation.”
She also said that Australian superannuation is seen in some quarters as a “sacred cow”, leading some to leap to its defence whenever tweaks are made to the system.
“While we’ve been talking for some time about diversification of investments, we haven’t really spoken about diversification of members”
“Its origins are steeped in political mythology and ideology, as part of our industrial relations history,” she said. “People feel quite protective of that. From some quarters, not many, it was seen as an attack on that – it wasn’t that at all, it was simply providing Australians with a flexible option … to access a small amount of their own savings at a time when they felt they needed it the most.”
Continuing early withdrawals
At the time of writing, the latest figures on the withdrawal scheme published by the Australian Prudential Regulation Authority showed that superfunds have paid out A$17.1 billion across 2.3 million applications up to 21 June – with an average payment of A$7,492, some way below the maximum A$10,000 permitted.
With just one more week to be added to those figures before the first withdrawal window expires on 30 June, the figure is unlikely to increase massively, but eyes are now turning to the second tranche of A$10,000 withdrawals that will be permitted from 1 July onwards.
“We’d expect to see a little tick-up,” Hume said, adding that the government doesn’t expect the number of Australians applying to increase by much, but that many may decide to “go back for a second go”. Therefore, the second tranche is forecasted to end up slightly lower than the first, if not everyone withdraws the same amount again, meaning that Hume’s forecast (now at A$29.5 billion, she told us) probably won’t end up too far off the mark.
She said that the amount that has already been withdrawn is roughly equivalent to just 0.5 percent of the whole system’s assets, which she described as “a really small amount”.
But calls for greater policy certainty have begun to emerge from the sector, with the A$53 billion Rest Super saying in May that continued early withdrawals would hinder its ability to invest in long-term assets like infrastructure.
Hume said that the government expects the current iteration of the scheme will be “sufficient” to help people who are suffering from financial distress, but flags that reforms will be made to the withdrawal process as it exited pre-covid to make it more efficient.
“I don’t want to say we’re going to shut down the early release scheme entirely because it’s always been around, but we’ll better streamline it,” she said.
On reforms to the sector more broadly, Hume argued that the pandemic will have made some funds with particular membership concentrations – such as those that draw their membership primarily from the hospitality sector, for example – more aware of the systemic risk they were exposed to by that.
“We’ve actually had some pretty significant learnings from this experience about how we can better create a permanent early access scheme but with a much, much tighter criteria that allows for people that are in genuine financial distress or have significant health concerns to access their super, as they always have, but with a more predictable process and outcome.
“It is a risk that’s been hiding in plain sight for 30 years. While we’ve been talking for some time about diversification of investments, we haven’t really spoken about diversification of members, and because you’ve always been able to access your super, and bear markets will always be with us at some stage, we probably should have been able to see that that systemic risk existed.
“There has been a tendency for funds to find a like-minded brethren in the superfund they merge with, in similar industries. I think there are opportunities now to think outside the box”
“We are expecting a number of mergers to come about in the next few years, as the regulator has made it very clear that’s what they expect and that there’s a need for critical mass in order for these funds to remain competitive. There has been a tendency for funds to find a like-minded brethren in the superfund they merge with, in similar industries. I think there are opportunities now to think outside the box, to ask what funds could merge to reduce systemic risk overall. That’s a new way of thinking, but quite important.”
In addition, Hume expects that merger trend to only accelerate as a result of the pandemic.
“I think it probably will [accelerate] because when the tide recedes you see who’s swimming without their trunks on, and some of the funds have found this process uncomfortable,” she said.
“I think there will be a number that, if they weren’t thinking about [merging] before the crisis, may be now. But we think that’s a good thing. There are so many funds out there, this is not a market that’s highly concentrated, there are plenty of options.”
Hume added that she would “love” to see superannuation funds get even more involved in investing in Australian infrastructure as the economy moves into its recovery phase, but emphasised that the government will never direct superfunds where to invest.
The pandemic has caused a rethink around how and how often unlisted investments are valued at some funds, she said, calling for greater transparency generally.
“We think that, particularly in a compulsory system where there’s an awful lot of disengagement with those who are compelled to put away A$1 in every A$10 they earn, that the corollary of that should be transparency and accountability from the trustees, if they’re to genuinely live up to their titles. Again, that’s not necessarily a response to covid, it was underway beforehand, and is something we’ll continue to move on.”
And, Hume argues, one silver lining to come out of the crisis and the early release scheme is that the average Australian seems to be more engaged with their superannuation account than ever before.
“One of the great problems of super in Australia has been that, because it’s compulsory and complex, and opaque, there’s been a level of disengagement. That seems to have shifted now because of this temporary early release programme and that’s a good thing.
“It’s something we should leverage to create a better sense of responsibility and engagement with individuals’ financial well-being. We’ll definitely look to this experience to build better financial engagement strategies in the future.”