The federal government’s decision to allow financially stressed people to access $20,000 of their retirement savings in the wake of the coronavirus pandemic has taken the superannuation industry by surprise and added further liquidity pressure on funds that are already reeling from a sell-off in the equity market and requests from member to switch to cash.
Treasurer Josh Frydenberg made the announcement on Sunday as part of a broader $66 billion stimulus package to mitigate the fallout from the outbreak that has killed more than 13,000 people worldwide and is tipped to plunge the global economy into a recession. Under the new provision, struggling Australians will be allowed to withdraw $10,000 tax free from their super fund this financial year and a further $10,000 the following year.
“These extraordinary times demand extraordinary measures,” the treasurer said in a statement. “The government is taking unprecedented action to strengthen the safety net available to Australians that are stood down or lose their jobs and increasing support for small businesses that do it tough over the next six months.”
Frydenberg, who did not consult the industry’s chief executives ahead of the announcement, said the provision would release less than 1 per cent of the almost $3 trillion saved in superannuation. He also said that the Australian Prudential Regulation Authority had advised the government that there would be no significant impact to the industry.
Even so, the policy measure follows a more than 30 percent sell-off in equities since the peak in February, which has erased trillions of dollars in the value from the market worldwide and prompted many fund members across Australia to switch their retirement savings into cash accounts. The country’s super funds also have the highest average allocation to equities among the world’s seven largest pension systems including the US.
Industry Super Australia chief executive officer, Bernie Dean, cautioned that the government’s provision must be handled carefully in order to prevent the compounding of liquidity pressures that may be faced by funds in the current market conditions.
“Although industry superannuation funds were not consulted in the formulation of this proposal, we stand ready to engage with government and the Australian Tax Office (ATO) to make it work,” he said. “Assisting those in financial hardship will come down to how well the ATO works with the funds, given each superannuation fund will have to manually issue the money.”
Dean also called for a commitment from the government to transparently report the scheme’s applications and any issues that may be encountered. “The scheme should also be reviewed as it is rolled out to ensure it will not hamper funds’ capacity to support the macro economic recovery.”
Liquidity risk paramount
David Bell, executive director of the Conexus Institute and former chief investment officer of Mine Super, said among the range of important issues that superannuation funds would need to consider including additional administrative costs, the most obvious was liquidity risk management.
“They have to look at where this grant scheme is an additional stress point on funds which have already been impacted by large falls in public stock markets, currency hedging impacts from a falling Australian dollar and member switching,” he said. “Hopefully all the work that APRA has done with funds on liquidity stress testing ensures that the super industry is well placed to absorb this additional scenario.”
Bell said funds that were likely to be the most impacted were those that have large numbers of small-balance members with at-risk jobs, such as contracting, casual work, and industries which have been hit the hardest. He added that the impact on individual accounts would vary greatly because the policy was based on a dollar withdrawal not a percentage of account.
“For those who are young or have experienced intermittent employment it could be a large portion of their superannuation balance,” he said. “It potentially means selling assets at reduced prices, but this is a subjective point: I’m not sure there are too many people who are adamant that the current market represents a buying opportunity.”
AustralianSuper CEO Ian Silk said in a brief statement that the country’s largest superannuation fund was working on developing all the necessary steps to implement the announced measures. “The efficient running of the overall superannuation sector – in the interest of superannuation fund members – will need to be closely considered as the plan is rolled out and timing and processes confirmed,” he said in the statement.
Jeremy Cooper, chair of retirement income at Challenger, said in an interview that the big question for the industry was how quickly the policy measure would add to the industry’s existing liquidity pressures. He said the three key issues for funds were big foreign currency exposures, the desire for members to switch to cash, and managing illiquid investments like corporate bonds which they would like to exit but can’t because there isn’t the market.
“It’s unclear how much liquidity the funds currently have,” Cooper said. “This is an additional set of new claims that weren’t there last week. There will be more demand for realising assets when it is a bad time to be selling anything right across the board. We don’t know the demand, we don’t know how many people will front up and tap into their super.”
The treasurer said the early release provision was available to those welfare recipients who are eligible for the coronavirus supplement as well as sole traders who had seen their income fall 20 per cent or more as a result of the outbreak.
“This initiative builds on in provisions on the super on the grounds of compassion grounds or hardship and up to $27 billion of superannuation can be put back into the pockets of hard-working Australians,” he said.
ASFA chief executive officer Martin Fahy said that his organisation would work constructively with government and regulators to help minimise the impact on the long-term retirement savings of Australians.
“Early access to retirement savings should only occur under extenuating circumstances and we need to ensure it gets to those who need it most, in an efficient manner,” he said. “The measures announced are very broad in terms of eligibility and we will work with our members to help understand the challenges that will present.”