How financial planning around super will likely change

4 May 2020

Financial planning around superannuation may be forced to change as a result of the impact of COVID-19 and the efforts of superannuation funds to increase their cash holdings, according to actuarial research house, Rice Warner.

It said superannuation funds are likely to keep high levels of cash well into the future for fear of a repeat of the Government’s COVID-19 hardship early release regime.

In an analysis of the impact of COVID-19 on superannuation funds, Rice Warner has pointed to the liquidity issues which have already faced funds but expressed relief that, at this stage, none appeared to have gone to the Australian Prudential Regulation Authority (APRA) seeking approval to cease rollovers due to illiquidity.

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“Most funds will manage, but some operate for members in industries with high levels of unemployment,” it said.  “As JobKeeper does not allow for any superannuation contributions, the regular cash flow has been severely disrupted.  None of this could have been foreseen.”

“The heavily-impacted funds might need to sell some assets to support their cash flows.  Not only does this mean selling at depressed prices, but it reduces the scope to buy other discounted assets as they become available,” Rice Warner said.

“Fortunately, we are not aware of any funds that will need to ask APRA for approval to cease rollovers due to illiquidity (Section 6.36 of the SIS Act).

“One of the implications of the Early Release scheme is that funds will hold more money in cash (earning very little).  They will be worried that this precedent could be repeated, and they need to be better prepared.

“Superannuation funds with a significant proportion of members in those industries most affected at the moment (such as hospitality, retail and tourism) may seek to attract more members in other areas as well as building up membership of their account-based pensions.  This will provide an increased buffer against another one of these (hopefully) one-in-a-hundred-year events,” the Rice Warner analysis said.

“Over the next decade, the superannuation industry is not likely to have the same earnings pattern as enjoyed over the last 20 years,” it said.

“This will mean new targets,” the analysis said and questioned whether Consumer Price Index (CPI) plus 3% to 4% will remain viable over the next ten years?

“Perhaps it will be if CPI is negative for some of this time,” it said.

“If targets are reduced, that will flow into communications material, online calculators and financial advice models. It will also reduce projected future retirement benefits for members and possibly reduce confidence in the system, despite its clear value for most Australians.

“It is also fair to say that forcing superannuation funds to hold more liquidity in anticipation of another unexpected Government requirement will reduce the long-term earning capacity of superannuation and eventually lead to lower tax revenue and higher Age Pension costs.

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Thanks for the lesson on asset allocation Rice Warner, we’ll take it from here thanks. I’d suggest any planner worth their fee is acutely aware of how to transition a client portfolio during the pre-retiree and retiree phases. I highly doubt that HostPlus Balanced forms a large part of their retirement plan...

Wow, but I fail to understand how this affects advice. Advice is about the client, and their goals. The super fund needs to manage the funds liquidity in line with government regulations, not the advicer show have nil ability to control the liquidity of individual investments.... Help anyone. Can you please explain this in more detail for me.

Robin, we know planning is more than just superannuation, however the boffins at RW wouldn't know that. They are too busy reading the wall st journal and sipping dirty chais to actually speak to planners directly, or clients for that matter. They must also rub the crystal ball a bit too, to get all these forecasts about negative CPI and long term low growth. You would think a new member or any existing ones making contributions now would end up getting decent returns, but no, the boffins at RW know everything, just ask them, they will tell you themselves.

Another researcher who has no idea what is really going on in the SMSF retirement space & what retirees are really chasing. Happy for these researchers to think they know all about it (when they don't).

Financial planning over the last 20 years has become more and more complex thanks mainly to institutions and industry super funds trying to create a facade of sophistication in what is a pretty simple process. This facade is necessary to ensure the average investor feels that they are not only receiving value for money but also deter consumers from following a DYI strategy - until recently one of the significant growth segments of super. The amount of technical research, information and opinion being released onto the public airwaves courtesy of research houses, economists and various experts is mind-boggling which I believe is used only to ensure a continued confused mindset within investors. And whose only perceived solution is to seek help from all those friendly people at their fund.

In the future, a successful adviser will be someone who can disregard all this financial minutiae being endlessly pumped out, and communicate to clients the absolute simplicity of what saving for, and spending in, retirement. A failed planner, on the other hand, will be someone who actually believes and embraces the poppycock being peddled by product manufacturers as somehow being helpful to the cause of their clients. (Although a complete failure to understand the financial planning process is usually the first step on the ladder of success towards management at our major banks! - sorry bankies, just can't resist!)

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