Craig Roodt, the director of investment and wealth advisory at Deloitte Consulting, says it was impossible for super funds to properly prepare for the Government’s early release super scheme.

“It’s a very hard risk for any super fund to manage,” he says. “That’s a fundamental rewriting of the underlying rules of the system. It’s almost in the category of an unmanageable risk.”

Roodt says that while it is unlikely, the Government could also make the whole super system optional or allow access to some funds each year, which would also be hard for super funds to prepare for.

Given that uncertainty, organisations should focus on becoming “generally ready and resilient”, such as building a strategy to better withstand liquidity shocks like early access.

That is “a really difficult thing to do”, Roodt says.

To listen to the recorded interview with Craig Roodt on the Market Narratives podcast click above or find the series on Apple Podcasts, Google Podcasts or Spotify.

Underlying assumptions

The first step is for organisations and asset managers to ask: is there a fundamental underlying assumption that my process and portfolio is based on?

“If this underlying assumption gets snapped, we get snapped,” Roodt says.

Before the GFC, he notes, one of the underlying assumptions in the financial markets was you could get liquidity, but you had to pay for it. “That got challenged.”

When Roodt was at APRA, the regulator used to talk about liquidity.

“Many funds could just not see there was even a potential issue. At the time it was like trying to describe a colour to a blind person. There was no way they could conceive of it because the whole system was growing,” he explains. “Then the GFC was a sharp shock that showed this isn’t the case.

“It’s about challenging underlying assumptions and trying to build something that’s resilient, so if you deal with as many risks as possible, reasonably, you’re more likely to be able to withstand those things that can be foreseen.”

Premortems

Organisations and funds should also perform ‘reverse stress tests’ or ‘premortems’: looking forward 5-10 years and working on the assumption that you failed, and then working out what could lead to that failure.

If it has a severe impact, funds can then assess whether they want to manage it. Roodt notes that it might cost 1 per cent a year to insure against a particular risk, which makes protection too expensive.

Premortems are vital for governance because there is a difference between a bad process and bad outcome. “If you have a bad outcome you need to be able to show the process, chain of decision making.”

Roodt adds that it is really important that if, after doing a premortem, you decided you are not going to do anything about a risk, to be able to explain how you looked into it and decided not to act to mitigate it.

Nothing perfect

Roodt says the Covid-19 crisis showed that things can change very rapidly.

“You go from a situation where you have liquidity to a situation where you don’t,” he says.

No risk management approach would be perfect for the next crisis, but you look at the past to get an idea of what could happen.

“People doing stress testing and liquidity stress testing, liquidity planning didn’t know they were going to get hit by an early release rule,” Roodt continues.

“But they were better prepared than if they had done no stress testing. One of the things about stress testing and scenario analysis is it makes you think about what can actually happen and you can start planning and preparing for it.”

Ben Power is a writer and journalist. He has written on business, finance, economics and investing for the Sydney Morning Herald, The Australian, Bloomberg News, The Australian Financial Review and Financial Times Business Media.
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