First wave of superannuation withdrawals in Australia amounts to A$4.4bn

Estimates suggest that anywhere between A$27bn and A$50bn could be withdrawn from superannuation funds, but there should be adequate liquidity in the system to cope.

Billions of dollars are set to be withdrawn from Australia’s superannuation system under changes to regulations that have allowed fund members suffering from financial hardship due to the coronavirus pandemic to access savings early.

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Federal superannuation minister Jane Hume said on Friday that the Australian Taxation Office had approved 527,000 applications to withdraw funds early, totalling A$4.4 billion ($2.7 billion; €2.6 billion). This amounts to an average withdrawal of around A$8,300 per request.

Ministers announced two weeks ago that more than 600,000 requests had been made for early withdrawals, indicating that the final total will be significantly higher than the current A$3.8 billion figure, with further applications expected over time.

The government announced the early superannuation withdrawal scheme in March to allow people suffering from financial hardship to access A$10,000 of their superannuation savings before the end of the financial year on 30 June, as well as accessing a further A$10,000 in the next financial year should they need it.

The average figure of more than A$8,000 per request to date shows that many withdrawal requests have been for the full A$10,000 amount, as modelling from superfunds had predicted.

Hume said in a radio interview this week that the numbers were “just the beginning, it’s still early days”, and that the government expected around 1.7 million Australians to request withdrawals in one or both tranches, amounting to approximately A$27 billion in total withdrawals from the system.

Martin Fahy, chief executive of the Association of Superannuation Funds of Australia, told Infrastructure Investor there was ample liquidity in the system overall as it was “very unusual” for a superfund to have less than 40 percent of assets allocated to equities, with further allocations to fixed income and cash on top of that. This means sales of illiquid assets to shore up liquidity were relatively unlikely in the short term.

“While funds are highly liquid in terms of equities and fixed income, the impaired market means that any additional cashflow – and the issue is cashflow rather than liquidity – comes at a high price, because funds will be selling into falling equity and fixed income markets,” Fahy said.

He noted that the funds most likely to be impacted were those that draw the majority of their membership from industries such as hospitality, tourism, entertainment, transport and, potentially, construction.

The Australian Financial Review reported this week that A$53 billion industry superfund Hostplus, which draws most of its membership base from the hospitality sector, is seeking to sell or redeem a A$1.5 billion stake in Industry Super Property Trust Core Fund, a A$15.7 billion unlisted property fund. There is no sign yet that Hostplus, or other funds, have sought to make redemptions from unlisted infrastructure funds.

Fahy said the industry was prepared to do its part in helping manage the economic burden for Australians, but that it was unfair to criticise funds for not having stress-tested for a situation like this.

“The promise of superannuation has been changed. If you’re 25 years of age, the government has changed it from a retirement income product that matures in 40 years’ time to a term deposit that matures in six weeks’ time. That therefore gives rise to a mismatch in the maturity of the underlying asset allocation,” he said.

“You don’t stress test for being turned into a bank overnight and being told that a couple of million of your members can withdraw their term deposits. That has meant funds are driven to convert the liquid assets that they have into cash, and that’s going to impact not just the member who draws down the money but also the existing member who doesn’t.”

Borrowing ban

Fahy said regulations in Australia mean superfunds are prevented from gearing or borrowing money, unlike banks.

“Funds are not allowed to borrow and they don’t have access to the discount window, and yet overnight they were turned into term deposit machines where anywhere from A$22 billion to A$50 billion at the upper end of estimates can somehow become available. It’s actually quite extraordinary,” he said, adding that Australia has effectively partly “privatised the burden” of financial support onto individuals by allowing them to dip into their retirement savings, rather than providing it through other state-backed mechanisms as has been seen in other jurisdictions.