Nick Callil

The federal government has identified membership cohorts within industry funds as a new systemic risk for Australia’s $3 trillion superannuation industry.

Speaking at the Investment Magazine & Professional Planner’s digital Retirement Conference, Assistant Minister for superannuation Jane Hume said recent events since the outbreak of the coronavirus had highlighted cohorts as being a whole new risk that the government had not considered before. Willis Towers Watson’s head of retirement Nick Callil said at the same event that the crisis had “exposed some cracks in the system.”

“There is always the opportunity for one particular industry or a number of industries to be affected by a particular issue in the economy and I think that is the systemic risk we hadn’t really considered before,” she said. “It’s something that we would look at in the future.”

Liquidity buffers have become stretched across the superannuation industry after the pandemic triggered a sell-off in equities and a wave of members switching their retirement savings into cash. The new government policy that allows financially-stressed people to tap part of their super early has added further pressure on cash reserves and prompted funds, including Cbus Super and MLC, to sell some assets to manage potential claims.

“I’m not naming any names of funds,” the minister said. “The vast majority of them out there particularly the large ones, even some of those who have a reasonably homogenous membership base, have done very well throughout this process and have made sure they are well prepared.”

Callil said while many funds had already looked to diversify their membership base, such as attracting money from the self-managed super funds, more thought needed to be given to diversification. He also said that the crisis would accelerate merger talks between funds that were already under pressure.

“The industry fund model where funds have membership drawn from a particular occupation has its weakness and we are seeing that now,” Callil told the audience. “The funds clearly that are under stress are those with members centred in the hospitality and retail sector, which you would think were going to get hit the hardest.”

Rest, the $57 billion fund with a large number of members employed on a part-time or casual basis in the retail industry, and Hostplus whose members are mainly employed in hospitality, said earlier this week that they have enough liquidity, despite both industries being hit by a wave of unemployment from government-enforced social distancing.

HostPlus chief executive David Elia said that they had “billions of dollars of cash sitting in the bank” and had not needed to sell one share since the crisis began. He said around 570,000 of their members had account balances with less than $10,000, making up $1.2 billion of total funds.

Callil said addressing membership cohorts was already on the agenda of many funds as seen by the wave of mergers announced over the last 12 months.

“What the industry is going through now puts a new light on that,” he told the audience. “Scale is one aspect but actually getting some diversity to weather the storms that we are seeing at the moment is another factor that will be taken into account.

“I’m not talking about crisis mergers so much, but this will be the last straw for some funds who were probably heading that way already.”

MLC’s chief executive Geoff Lloyd also said at the same conference that those funds with a lot of illiquid assets and one cohort of employees were in no doubt “going to be in trouble.”

Sarah Jones worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
2 comments on “Crisis exposes industry fund ‘cohort’ risk”
  1. Funds that are required to pay cash out to members will be reducing cash balances and therefore transferring more illiquid assets among a declining membership/asset base.

  2. Avatar Christoph Schnelle

    There is another systemic risk: Valuation risk.
    If an industry fund invests in illiquid investments and doesn’t revalue them down with the market, then the account balances of the members are overstated.

    This gives an incentive for members of the overvalued default fund to exit the default fund and to invest in fairly valued and therefore lower valued sector funds. An interesting piece of arbitrage, especially as for many funds this can be done without taxation consequences. However, it hurts those members who remain in the default fund. I can’t see this issue being a problem for a while but the more extreme the investment allocations become and the more valuations are … delayed, the bigger the arbitrage.

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