In their recent Global Financial Stability Report, the IMF drew attention to the fact that despite funds processing member investment switches within three days, over 20% of assets are tied up in less liquid investments. "This flexibility may exacerbate liquidity mismatches between the underlying assets—especially illiquid assets, such as private equity and credit—and plan liabilities because the effective duration of the liabilities has been reduced," noted the report.
Such mismatches pose threats not only to individual member outcomes but also to broader financial markets, especially during times of liquidity stress. Super funds are significant players in stock markets, government bonds, and corporate debt, so widespread liquidity issues could ripple through the financial system.
However, leaders within the superannuation sector emphasize the importance of the current framework, which balances member autonomy with diverse investment opportunities.
Industry Response: A Balancing Act
Mary Delahunty, CEO of the Association of Superannuation Funds of Australia (ASFA), argued that flexibility in switching is crucial and aligns with global diversification trends. She pointed to typical member preferences for blended investment strategies, indicating minimal risks to sectors like property.
Delahunty emphasized that Regulatory oversight further ensures that funds are equipped to handle member switching requests without undermining the stability of the broader financial system. ASFA remains optimistic about the efficacy of current liquidity management practices, citing a balance between immediate member needs and long-term fund performance.
Wayne Swan, chair of Cbus, underscored the necessity of illiquid investments in achieving substantial long-term growth for members. In light of remarks from Shadow Treasurer Angus Taylor about restructuring super to resemble global counterparts like the 401(k), Swan defended the system's stability, asserting the value derived from maintaining the preservation principle to secure worker and economic benefits.
Studying the “Illiquid” Component: A Closer Inspection
The IMF’s 20% illiquid figure, flagged in a Morningstar analysis titled "Is your industry super fund too illiquid?", raises additional questions. Morningstar identified the alignment between unlisted and illiquid assets as imprecise, outlining that current public disclosures do not always transparently convey liquidity status across varying timelines.
"Measuring illiquidity is challenging, and while ‘unlisted’ does not equal ‘illiquid,’ the liquidity ladders of super funds remain undisclosed," noted Morningstar, prompting stakeholders to re-examine the assumption of what constitutes liquidity.
Navigating Challenges Ahead
Australian super funds have proven resilient in prior crises, such as during the Global Financial Crisis and the COVID-19 recession-triggered Early Release Scheme. The Reserve Bank of Australia's review noted that funds efficiently increased cash reserves by $51 billion in the March 2020 quarter alone, indicating adaptability through asset trades and redistributions to cover liquidity needs.
Nonetheless, ongoing adjustments are crucial. The Reserve Bank advises bolstering liquidity strategies to manage synchronized market sales or respond to shifts in contribution dynamics as membership ages progress towards the retirement phase.
By maintaining vigilance and strategic asset allocation, the super sector demonstrates its committed stewardship over member assets amidst evolving economic landscapes.
