A bail out for superannuation funds in the form of a repurchase funding facility made available by the Reserve Bank of Australia wouldn’t pass the “public interest test”, according to RBA governor Philip Lowe.

While Lowe noted that some scenarios have suggested up to 25 per cent of the value of funds under management of certain funds may need to be withdrawn, he added that these funds have had months to prepare and that withdrawals of this magnitude should be manageable.

“For some funds, withdrawals are likely to be large, and those funds will have to shrink,” Lowe said.

“For the RBA to provide a funding facility it would need to pass the public interest test and we would need to conclude it would be required to support the stability of the financial system and at the moment we are not willing to conclude that,” he added.

Professional Planner and its sister publication Investment Magazine have followed the impact on funds with concentration of members hardest hit by the government’s emergency response to the COVID-19 crisis closely in recent weeks. Investment Magazine reported yesterday that some of Australia’s largest superannuation funds are preparing to step in and snap up assets owned by Hostplus should the $50 billion industry fund need to free up liquidity to fund withdrawals.

Along with Hostplus, Rest Super was another industry fund with members concentrated in areas hardest hit by the outbreak of the coronavirus which will need to meet the redemption requests of many of their members who mostly work in the hospitality and retail industries. Hostplus and Rest both held more than 40 per cent of illiquid assets in their balanced funds before the market rout, Investment Magazine noted.

There have now been 975,300 registrations of interest for early withdrawal of super under the government’s emergency scheme, according to the latest ATO number. The government’s measures allow individuals hit hardest by the COVID-19 crisis to drawdown $10,000 this financial year and a further $10,000 in the new financial year.

Bumpy road ahead

Lowe painted a grim picture for the local economy in the short term, but gave some reason for optimism in the medium term during the RBA’s Economic and Financial Update on Tuesday afternoon.

He said national output (GDP) would likely decline by 10 per cent (mostly in the June Quarter), hours worked would decline by 20 per cent, and unemployment would likely rise to 10 per cent by June.

“These are all very large numbers and ones that were inconceivable just a month or two ago, they speak to the immense challenge that our society faces in containing the virus,” he said.

Lowe said he expected unemployment to remain above 6 per cent over the next “couple of years”, and for wage growth to decline over this period. He added that the RBA would keep interest rates at current levels for “two to three years” while inflation remained below 2-3 per cent and unemployment remained elevated.

Lowe said he believed there was some room for optimism considering the RBA’s considerable and continuing bond buying program and record low interest rates.

Lowe’s cautious optimism, however, was tempered with extreme the magnitude of the situation.