The government’s attempts to politicise liquidity in the superannuation system risked turning Australia’s $3 trillion long-term savings scheme into a short-term cash box, warned Frontier Advisors chief executive Andrew Polson.
“The critical lesson from the fallout from the coronavirus crisis must be to take politics out of super,” he said in an interview with Investment Magazine, before adding that the industry’s liquidity issue was just “a furphy.” The asset consultant said the real issue for Canberra’s strategic work on superannuation was that it is missed a “core purpose.”
Polson said most funds were holding more than enough liquidity to cope with foreseeable stress events, but he conceded that the government’s move to shut down the economy and provide emergency access of up to $20,000 of a member’s super early had disproportionately impacted some funds.
Hostplus and Rest, whose members are in the hospitality and retail sectors, have been hit particularly hard by the coronavirus crisis. Both superannuation funds held more than 40 per cent of illiquid assets in their balanced option before the market rout.
“When the federal government chooses to open up a long-term investment vehicle for members to access cash at exactly the time that markets have corrected, it demonstrates a lack of clarity in relation to the purpose of the system and a lack of understanding of the damage that withdrawing investments in the midst of such a correction can do to the long-term retirement outcomes,” he said. “If the core purpose is clear then people’s attitudes will change and people will be loath to treat super like a cash box or bank account.”
Polson made his comments before an expected surge in member redemptions after more than 800,000 members registered their interest with the Australian Tax Office to withdraw up to $10,000 of their super this financial year under the government’s new early-provision rules. The ATO is due to send the successful claims to the relevant superannuation funds from today who are then expected to transfer the money into member’s individual bank accounts within a week.
“This additional liquidity drain is a government-imposed problem,” he said. “It’s not a market-imposed problem nor a member-imposed problem. And it has been compounded by higher than usual amounts of switching to more conservative options in light of the significant market corrections we have seen. ”
Forced trading
Polson said the global shuttering of economies meant that unlisted investments globally were more difficult to value and trade. He added that while “there was no question” that these investments were appropriate long-term assets for long-term portfolios, the forced trading of these types of investments at times like this was problematic.
“Government expecting the superannuation system to simply turn these long-term investments into cash in times of market stress and unprecedented government-imposed restrictions was not anticipated and should not be politicised.
“This is a self-imposed problem that the system and its regulators need to work through in an orderly way to ensure that trust in the system is maintained.
“The choice our government has made and politicisation of the challenges funds now face highlights the problem that the superannuation system lacks an agreed purpose.”
The Frontier chief noted that most balanced funds had around 70 per cent of their investments in long-term assets, be they listed or unlisted.
“There is a very good reason for this strategy,” he said. “When the government chooses to temporarily allow members to monetise part of these investments there are sound arguments for government to work with funds to ensure that long-term investments don’t have to be monetised at exactly the wrong time be they listed or unlisted.
“This is not a political argument it is one about safeguarding the future incomes of Australians. It is as simple as that.”
He also called for a singular rather than a multi-purpose system that provided strong retirement income streams for the majority of the population.
“You can’t have it both ways,” he said. “You can’t optimise everything and that’s the big challenge for our system.”
Beyond that, Polson is adamant that any blueprint for the future must focus on member risk rather than peer risk. He warned that the headwinds faced by the industry was being compounded by the prudential regulator’s heatmaps which forced funds to focus on peer-relative performance on a 3 to 5-year basis, rather than ensuring that they simply deliver the risk and return outcome they have promised their members.
Mispricing illiquids
Nevertheless, he is hardly oblivious to the sharp focus on unlisted assets in super fund portfolios, given the liquidity challenges and pricing issues involved with revaluations.
“All investors are grappling with how to value their investments at the moment. This can be seen in the large gyrations in listed markets and is also clear in unlisted markets,” he said.
Polson said fund managers were working with valuers to move to monthly valuations and or out of cycle valuations. The chief executive said trustees were working with their investment managers and advisers to ensure that there are sound bases for the valuation of assets and to best manage member equity issues.
“In this instance, listed markets have generally reacted more severely than unlisted markets, with listed infrastructure and property valuation changes initially quite different to those of comparable unlisted investments,” he said. “These differences will narrow in time but cannot be seen as definitive in the early stages of this event.”
He warned that a listed infrastructure investment such as an airport that may have lost more up to 50 per cent of its value in the early stages of the market correction, was highly likely to be “significantly mispriced”.
“In times of severe economic disruption and market dislocation, the valuation of all assets, including unlisted and illiquid holdings, are hampered by fear and the unknown,” he said. “And right now, there is no corollary in market adjustments other than a world war.”
If you are in the superannuation space then one of the key risk is legislative risk. If you don’t cater for the government sharply changing its mind at short notice, are you doing proper risk assessment?
If you then take additional risks like making your portfolio more volatile than its title suggests (balanced funds with 80-93% in growth investments) and hold too little cash then you will look like a hero much of the time and you can be in substantial difficulties when one of the many very rare black swan events hits.
It is an effective approach to then lobby the government for relief but is it prudent to put yourself into the position to having to do so?