Liquidity management and potential for liquidity stress in superannuation (super) has recently been under focus by authorities such as APRA, the RBA and the IMF. In our Systemic impacts of ‘big super’ report of January 2025, we concluded that systemic liquidity stresses are unlikely to emerge from the super industry, albeit did not entirely rule out the possibility.
Here we trace out how we reached this conclusion through identifying the chain of events that would lead to a liquidity crisis in super. The idea is that the system must move through a series of ‘stage-gates’ before it lands in a crisis state. While our prime focus is on the super system at large, the framework may also be applied to individual funds with a few tweaks.
Our framework
The diagram below summarises the framework, which is described in more detail in our recent thought piece titled Why severe liquidity stress in superannuation is hard to foresee. The various levels capture the three stage-gates:
Stage-gate #1 (top levels, in yellow): Emergence of significant liquidity demands requiring raising cash
Stage-gate #2: Portfolio response from funds to generate the cash to meet those demands
Stage-gate #3: Any response from the authorities
Two branches sit below the ‘significant’ liquidity demands box. The left branch leads to system stabilisation. The right branch results in liquidity crisis, which might be envisaged as an event that causes considerable harm to the Australian economy, financial markets and/or super fund members across a wide base.
The question is how likely it is that the super industry moves along the right branch. Below we draw out the main considerations, noting that the specific elements listed are discussed in more detail in our though piece.
Stage-gate #1
Two issues are central to the first stage-gate of significant liquidity demands faced by the super system.
First is the potential for meaningful flows out of the system (noting that switching within the system is moving the deckchairs, at least to some degree). Key drivers could be retirees taking their money out of super en masse, policy changes around preservation, and (for APRA-regulated funds) wide-scale switching to SMSFs. Given the change in government and low rates of member switching, it is hard to envisage circumstances where more than 5%-10% of funds would be leaving the system.
Second is currency hedging. If the A$ falls, super funds gain on the value of their overseas assets but lose on their hedges and need to find the cash to settle. As a rough guide, combining currency hedges equal to (say) 25% of the portfolio (50% hedging on 50% overseas assets) with a 20% rise in other currencies versus the A$ would require a fund to source cash equal to about 5% of the portfolio.
It is possible to build ‘stress’ scenarios where super funds might need to raise cash equal to 10%-15% of their portfolio, or perhaps 20% if matters really get out of hand.
Stage-gate #2
The main trick is that super funds may sell their liquid assets to meet immediate liquidity demands. There are consequences, including a subsequently out-of-shape portfolio to be addressed over time, potential for higher tracking error to the YFYS test and peers, and possible losses from being a forced seller. Members may incur the costs, but a liquidity crisis will be averted.
Two things could bring the industry unstuck when relying on selling their liquid assets.
First would be if illiquid asset exposures were too high, leaving funds to manage some diabolical trade-offs around portfolio shape, tracking error, trying to sell difficult-to-sell assets, and perhaps flow-on outflows as member confidence sinks.
Second would be the liquid asset markets closing down. Not impossible, but unlikely to be the case on an extended basis.
Our modelling suggests markers of 30% illiquid assets and 50% currency hedging for where even more extreme liquidity demands should remain manageable. (These are general markers that might be further calibrated to a fund’s situation.) Currently, the super industry is sitting below these markers.
Stage-gate #3
The question is whether the government and its entities would come to the rescue if liquidity stress in super was threatening a systemic event. It is hard to believe that they would not, although they understandably won’t say so before the event. The authorities have a range of tools at their disposal, such APRA’s ability to suspend redemptions and RBA’s capacity to sure-up funding availability.
A super industry liquidity crisis seems unlikely – what about individual funds?
Considering the chain of events required and the probability of occurring, we consider it highly unlikely that the super industry as a whole would suffer a liquidity crisis under current industry settings. But what about individual super funds?
We see greater potential for a fund suffering a liquidity event. The key difference between individual funds and the system is the potential for members to switch out to another fund. In short, a ‘run’ on a fund is more likely than a ‘run’ on the super system. There is more potential for exposures and liquidity practices to vary across funds.
A fund suffering a liquidity stress episode could cause considerable harm to it members by being placed in the position of being a forced seller with potential for flow-on consequences for performance and member confidence. But it is unlikely to result in a major systemic event, in part because the assets would be transferred within the system.
The potential for individual funds to suffer a liquidity event makes APRA’s current focus on liquidity governance entirely appropriate. We see room for parts of the industry to improve on this front.
No cause for complacency
While we are arguing that a major liquidity stress event in super is currently quite unlikely, we also caution against complacency. Our conclusion reflects on current industry settings, and the super industry and markets will evolve.
For instance, if illiquid asset weights and currency hedge ratios start to move above reasonable boundaries, both trustee boards and regulators should pay more attention and place a keen focus on the integrity of liquidity governance, processes and practices. Other relevant changes could be substantial growth in the size of the super industry relative to the markets in which it operates, and signs of heightened member propensity to switch.
We hence encourage the authorities to remain ever vigilant, and fund boards to ensure that their liquidity management processes are fit-for-purpose.
David Bell is executive director of The Conexus Institute
Geoff Warren is research fellow of The Conexus Institute
The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
