Are super funds facing coronavirus liquidity issues?

In circumstances where some major travel and hospitality industry employers have already announced they are asking staff to take both paid and unpaid leave while senior executives are taking pay cuts, questions are being asked about superannuation fund liquidity.

Liquidity issues arose for superannuation funds during the global financial crisis (GFC) in 2007/08 but the impact of the coronavirus could be much more significant in circumstances where not only are superannuation funds holding illiquid assets but large numbers of members may be out of a job because of slow-downs in the travel, events and hospitality sectors but also the probability of large sporting events being postponed or deferred.

Rice Warner chief executive, Andrew Boal, said he believed that in such circumstances he believed that both superannuation fund trustees and the regulator, the Australian Prudential Regulation Authority (APRA) would be closing monitoring the situation.

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He said the issues warranting monitoring would be the level of illiquid assets held by affected funds and the impact on superannuation guarantee-generated cash flows if large numbers of workers ceased making contributions.

“I imagine that APRA will be closely monitoring that situation,” Boal said.

In the immediate aftermath of the GFC APRA took a close look at superannuation fund liquidity and implemented stress testing procedures but, as recently as 2016, lamented that not all trustees had taken the issue seriously enough.

However it warned against funds overlooking liquidity stating that “stresses that affect liquidity may not necessarily impact returns (or asset values) immediately”

“…in some circumstances, liquidity may be the most potentially severe risk faced by a superannuation fund in the short run – as occurred for some funds in the global financial crisis. Poor investment performance may ultimately lead to a failure to meet investment return objectives, and can lead to reduced confidence in the fund, but may not lead to a permanent loss of capital.”

“If it has inadequate liquidity, however, a superannuation fund could be forced to sell assets during a market downturn, thus crystallising losses. Furthermore, these losses could be more severe due to the adverse market impacts that are likely to be occurring at the same time.”

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As proven by the actual experience, not theoretical kite flying, large funds with decent unlisted assets faired quite well in and post the GFC, SARS (which by the way was also an especially travel and tourism impacting event) and several job shrinking recessions.

I’d be more worried having exposures to market asset heavy finds that are significantly more impacted by the panicked actions of some market participants, a deal of which isn’t a lot different to toilet paper hoarding behaviour.

Yeah but... people are hoarding Toilet Paper because of a fear they will not be able to get it (so it seems) and time will tell.
Unlisted assets - you ever tried to get your money back? Might be OK, might not, All we need is a nice little rumor that Industry Super is having problems paying people their money and bingo, you have a serious issue. Not saying this will happen, but these things do happen and it only needs to happen once - and I for one do not want to be looking at my client explaining why I allowed their money to be invested in an asset with such an obvious vulnerability. Perhaps I could use your explanation, but seriously, clients are looking for more "experience" than your statement.

Back in March 2019 Sam Sicilia Hostplus’ CIO (Chief Investment Officer) was interviewed by Bloomberg. Saying..... and I hope this was a miss quote
“Hostplus has held no cash since at least 2011 and bonds in its portfolios were effectively zero over the past three years, according to Hostplus. The firm prefers stakes in office buildings, pipelines and emerging technology”.

I understand he’s since explained what was meant about that statement.

Which was?

Seems industry funds holding direct assets that aren’t valued very often to feather returns are going to get burned by having to withdraw listed assets at the very worst time..
Next years returns are going to be abysmal.
I have to say it’s poetic justice happening to these shady funds..

Except that they'll lie. And ASIC will allow them to.

After the market downturn just watch the union funds rename their "balanced" funds as growth, which they should have been all along. Then they'll rename conservative as "balanced", and hey presto "industry" balanced funds outperform "retail" balanced funds. And they'll prove it using "independent research" from SuperRatings and Chant West who have long turned a blind eye to union fund misrepresentation.

It's no August 2020 and the financials are in, these industry funds have dropped from top 10 this year, due to exactly what this article says - illiquidity in their off-market project that nobody wants or can use. Buildings, bridges, stadiums, all that sort of unionised development they so fondly support with our money. Oh well, the chickens will roost...

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