This year has proven to be a challenging time for investors around the globe, with plunging stock markets, declining bond yields and general economic malaise combining with restrictions on movement to create a perfect storm.
In Australia, the superannuation sector was already going through a period of change. The Australian Prudential Regulation Authority had said it wanted to see fewer funds with higher average levels of performance. This led to several mergers either being completed or announced pre-pandemic.
But in addition to the turmoil being experienced everywhere else, Australian superfunds were landed with an extra factor to consider in the form of the federal government’s Covid-19 Early Release Scheme.
The Australian government changed regulations in April to allow people suffering from financial hardship as a result of covid-19 to access up to A$10,000 ($6,859; €6,116) from their superannuation accounts before 30 June (the end of the financial year in Australia), as well as an additional A$10,000 after that date.
There have always been provisions in place for members suffering financial hardship to access their superannuation accounts early. However, these were significantly relaxed, with an applicant under the covid-19 release scheme only having to show that they were now unemployed, had had their working hours reduced or were receiving one of several benefit payments to be eligible for the payouts.
Martin Fahy, chief executive of the Association of Superannuation Funds of Australia, described this as the government having “privatised the burden” of financial support on to individuals by allowing them to dip into retirement savings – rather than it being provided solely by government schemes, as has been the case in other countries.
What effect has this policy, combined with the broader economic downturn, had on the thinking of superfunds? And have dire predictions about the impact early withdrawals could have on the sector as a whole come to pass?
The early withdrawal scheme has had wide-ranging impacts already.
According to the latest APRA data for the period ending 14 June, superfunds had made A$15.9 billion in payments to members in total. These were made across 2.1 million applications, with an average payout of A$7,486, or three-quarters of the maximum payout allowed.
APRA’s figures show that 150 of the 177 funds, or 85 percent, that submitted data had made early release payments. The top 10 funds on the list have taken disproportionately large hits, accounting for A$10.46 billion of the payouts across 1.42 million applications.
AustralianSuper is top of the table, largely due to its size, having paid out A$2.13 billion to 14 June. Rounding out the top five are: Queensland-based Sunsuper (A$1.6 billion); hospitality-focused industry fund Hostplus (A$1.46 billion); retail-focused fund Rest (A$1.45 billion); and construction-focused fund Cbus Super (A$907.37 million).
Those figures make clear that funds with membership concentrations in industries hit hard by covid-19 – such as hospitality and retail – have seen the highest levels of member withdrawals.
“We’ve got quite a strong liquidity position in the fund and we were prepared to pay out a lot more if we needed to”
Michael Winchester, First State Super
“The promise of superannuation has been changed,” ASFA’s Fahy told Infrastructure Investor in an interview in April. “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 [sooner]. That therefore gives rise to a mismatch in the maturity of the underlying asset allocation.”
Naturally, this would lead funds to convert liquid assets into cash, impacting not just those members who are drawing down their money but also the members who remain in the funds with their full balances.
In an opinion poll by investment consultancy bfinance, conducted in March during the early stages of the coronavirus downturn, a majority of investors – 62 percent – said they were satisfied with their allocation to private markets despite the need for liquidity.
However, Frithjof van Zyp, a director of bfinance based in Sydney, says “there was certainly quite a bit of rebalancing going on” among investors, including in Australia, during the first weeks of the crisis. Now the dust has started to settle, notwithstanding uncertainty about the future, he says investors have broadly fallen into two camps. “There are those who had made plans prior to covid-19 and have stuck to those plans, despite all the turmoil that has ensued,” he says. “And there are those that have taken a step back and looked to reposition themselves appropriately for the new environment, by holding off on making certain allocations, in large part driven by liquidity concerns.”
In Australia, the early withdrawal scheme has forced some funds into the latter camp, although concrete signs of any major shifts in strategy have yet to play out in public.
“The ones that have been under more pressure, with the combination of economic downturn and early withdrawal, in many cases have been somewhat forced to take a step back and figure out how they can manage liquidity needs,” van Zyp says. “As a result, they’ve had to shift their thinking… and really think about how they’re using their liquidity budget to make sure they get the best bang for their buck, given that a lot of the assumptions have changed, particularly in private markets.”
Staying the course
One fund that can be said not to have changed tack so far is the A$100 billion First State Super.
The fund draws most of its membership from the public sector in New South Wales, including teachers, health workers and people in the emergency services. Most have not been disposed to access super early because they have continued working.
However, First State Super’s size – at the time of writing it is Australia’s third-largest superfund and its merger with VicSuper, due to take place at the end of June, will see it become the second-largest – has put it at number 14 on APRA’s list of early withdrawals, paying out A$263 million to 14 June.
Michael Winchester, head of investment strategy at First State Super, says: “It’s challenging but we were well prepared for it. We’ve got quite a strong liquidity position in the fund and we were prepared to pay out a lot more if we needed to.”
First State Super did not need to change its strategy, Winchester says, as the combined impact of the downturn and the withdrawal scheme fell within its stress-test scenarios.
“We generally have a lower level of illiquid assets in our portfolio than some other funds,” he says. “So we came into 2020 in a fairly strong position from a liquidity perspective. We run stress tests on our fund to really test how illiquid it might become under various market scenarios.
“There are those who had made plans prior to covid-19 and have stuck to those plans … And there are those that have taken a step back”
Frithjof van Zyp, bfinance
“We didn’t have a covid-19 scenario but actually the impact on liquidity was within the ranges of the stress tests we modelled – the big difference was that it happened within 22 trading days and not over a year-and-a-half period. In that sense, it was unusual and a bit shocking, but it was within the range of outcomes we’d modelled for, so we didn’t really need to take any emergency measures or look to sell things we didn’t want to sell.”
Members switching within the fund away from growth or balanced options to more defensive positions, such as cash, was also a challenge, and one that has been experienced by many other Australian funds where members are able to switch their options at will.
“The vast majority of our members did stay put, which is what we’d recommend, but our analysis shows those who switched [during previous periods of volatility] have stayed in the low-risk option,” Winchester says.
“It’s been 12 years since the global financial crisis, and we’ve got better at communicating with members, so we hope we can provide data and commentary to support them in a decision to switch back. I wouldn’t overemphasise it, but it’s probably more of a concern for us than the early access scheme.”
Although several other superfunds contacted by Infrastructure Investor declined to comment on the record for this story, they have been publishing statements periodically about the impacts of the early withdrawal scheme, as well as to provide notes on downwards revaluations of unlisted assets.
Two funds in particular have been vocal in saying the sector’s current crises show the need for wider reform.
In May, Rest chief executive Vicki Doyle publicly called for more stable policy settings for the sector, perhaps motivated by the regulator’s recent spotlight on funds and uncertainty about whether some funds could even be forced to merge with others if they have been underperforming.
“It’s important that a short-term approach to the current crisis does not create a longer-term crisis for Australia’s retirement savings”
Vicki Doyle, Rest
Doyle says: “It’s important that a short-term approach to the current crisis does not create a longer-term crisis for Australia’s retirement savings. If members’ super is regularly called upon to provide short-term fiscal support to the economy, it changes the way we invest on behalf of our members. We would need to consider shorter-term investment horizons and different asset allocations.
“With policy certainty, there is a greater opportunity for our members to benefit from investments that also support Australia’s economic development and recovery.”
Similarly, in June Hesta chief executive Debby Blakey said that its internal data showed the early withdrawal scheme was disproportionately affecting women, and that without urgent changes to the system as a whole, women would face a widening “gender super gap” and increasing financial instability.
Hesta found 62 percent of its female members who had made applications under the early withdrawal scheme had claimed the full A$10,000. It also found that members aged 18-24 were virtually draining their super accounts entirely, leaving this group with a median account balance of just A$1,049 – a median decrease of around 78 percent. The fund has paid out more than A$758 million in early withdrawals at the time of writing, placing it sixth on the APRA list.
“The early release scheme has provided vital short-term assistance for our members.” Blakey said. “But if urgent action is not taken, these young women risk facing a greater vulnerability to poverty as they age.
“We already know that women over the age of 55 are the faster growing group of people experiencing homelessness and unless we reform our super system to make it fairer for women and the lower paid we are consigning the next generation of Australian women to the same grim reality.”
Hesta’s proposed reforms include better financial recognition for unpaid carer roles and super entitlements to be provided for workers not classified as employees.
But will all this upheaval have any practical effect on allocations to private markets? If anything, says bfinance’s van Zyp, it should help prove the worth of pursuing a diversified strategy with private investments playing a major role.
“History would suggest these post-crisis vintages tend to do very well,” he says. “Things have re-adjusted, the entry points are quite attractive, and you’re not necessarily timing the market because the deployment period is usually over a year, so managers can be quite opportunistic.
“That’s why you’re seeing a flood of distressed and opportunistic strategies being marketed at the moment, because it is a rife environment for those allocations.”
This is borne out by two different Australian infrastructure fund managers who did not wish to be named. One said they had heard no concerns from LPs in their fund over liquidity, while the other said they had a queue of investors waiting to get into the fund after downwards revaluations made potential returns look more attractive.
“Ideally we’d like to buy good assets at attractive prices, rather than distressed assets,” says First State Super’s Winchester. “But that said, we’ve encouraged our team to be opportunistic in their thinking. And if we’re ever going to get an opportunity to buy things at really attractive prices, it’s likely to be during periods where other investors are more constrained.
“Notwithstanding all the commentary around liquidity, superfunds are very liquid portfolios in general, and we’re all well-placed to invest by supporting listed companies through capital raisings and investing in unlisted assets as they come to market.”