The RBA doesn’t see the super sector as posing systemic risks today, but as it continues to grow and evolve those risks could emerge in unexpected areas, according to Brad Jones, RBA assistant governor (financial system).

The RBA says that the growth and evolution of the superannuation system could see it pose systemic risks in unexpected areas in the future, though it doesn’t see the sector presenting specific risks today, according to Dr Brad Jones, RBA assistant governor (financial system).

“On the liquidity risk side, the thing that would concern us most is if you had a confluence of shocks,” Jones told the ASFA Conference on the Gold Coast.

That could be a major market stress event that coincided with a wave of operational risks – i.e. cyberattacks – and policy changes like early withdrawal that would mean super was no longer a “closed-loop system”.

“Because it’s really managed as a closed– loop system,” Jones said. “Money can move around within it, from defensive assets to growth assets, but it stays within the system. If you had a major external shock and then a net withdrawal of liquidity from the system at the same time, that’s going to make life quite difficult by virtue of the sheer size of the industry.”

Jones’ comments echo those made during his appearance at the Investment Magazine Chair Forum in January this year, where he said the RBA was examining how funds could inadvertently propagate shocks through the system.

“That could be through a combination of, you have some large market shock, which undermines confidence writ large,” Jones said.

“You also have a change in policy settings, unexpected change in policy settings… So you have multiple shocks coming together. How would that trace through, given that the interconnectedness in the system is much higher than it was 15 years ago during the global financial crisis?”

Liquidity uplift  

At ASFA, Jones said that super funds hold between 35 and 40 per cent of short-term bank debt, and said that it would be unrealistic to expect them to sell down assets quickly without creating disruptions – especially if they had to meet capital calls or margin calls on their FX hedges at the same time.

“There has been a significant uplift in liquidity risk management practices across the sector,” Jones said.

“The general sense from regulators is that it’s a bit uneven. Some of the larger funds are really doing liquidity risk management in a much more rigorous way than in the past, and the events of 2020 were a catalyst for that uplift, but it is a bit variable.” 

The RBA is also keeping a close eye on liquidity risk arising from super funds’ increased allocations to international assets, Jones said.  

“Half of [super] assets are now invested abroad; over time, I’m sure that will go up, and more of that will be hedged, because more of those flows will be fixed-income related as a result of our demographic profile, and there tends to be a higher hedge ratio for fixed income holdings abroad,” he said.

“And the margining requirements will probably become less favourable as the counterparties that the industry engages with expand. You can see a world where hedging demands are going to increase and the management of foreign exchange risk is going to become a bigger deal for the industry.”

A confronting set of risks  

What’s also worrying the RBA is the “fragmentation” occurring in global trade, security and finance – some countries are establishing payments systems that will never touch the US dollar or US dollar clearing system – and sovereign debt levels.

“It’s becoming increasingly difficult to see how anything other than a protest or a crisis in the bond market is going to be sufficient to jolt decision makers and fiscal authorities from their current path,” Jones said. “Most countries now have debt-to-GDP ratios in excess of 100 per cent, normalising the running of wartime-like deficits in benign economic conditions.”

But market pricing across asset classes doesn’t reflect that “quite confronting” set of potential risks.  

“The explanations I’ve heard in my travels is that various tail risks have not materialised so far, emboldening the animal spirits. Some market participants have a sense that if things were ever to get disorderly, the authorities – fiscal, monetary, whatever – would step in and put out the fire. Personally, I think that’s a pretty dangerous way to be allocating capital.”

“[But] markets just have a heck of a time trying to price extreme binary events… During the Cuban Missile Crisis, where we stood on the brink of catastrophe, the stock market fell about two or three per cent.” 

Brad Jones will appear at the 2026 Investment Magazine Chair Forum, to be held on 4 & 5 February at the Intercontinental Sorrento.