The degree to which the Government’s COVID-19 hardship superannuation early release scheme (ERS) impacted superannuation fund liquidity has again been referenced by the Australian Prudential Regulation Authority – this time by the chair, Wayne Byres.
Byres pointed the manner in which the usual steady stream of superannuation guarantee payments into superannuation funds had been quickly and unexpectedly undermined by the ERS arrangements.
His comments to a risk management forum came just a day after the regulator had admitted that a number of superannuation funds had faced liquidity issues stemming from the ERS which had needed to be addressed by converting some investments into cash.
Byres said that the liquidity issues flowing from the COVID-19 pandemic had not been surprising for the banks, but “came unexpectedly to the fore for the superannuation sector with the Government’s decision to temporarily implement an expanded early release scheme”.
“The Reserve Bank intervened early and strongly as COVID-19 took hold to make sure the financial system as a whole had plenty of funding and liquidity. But that did not mean there weren’t challenges for individual firms and funds,” he said.
“The superannuation sector, used to a stream of steady and predictable cash flows, had to grapple with a large, sudden and unexpected outflow. Banks benefited from that outflow from superannuation into household deposits, but on the other hand had to deal, for example, with a strong demand to redeem negotiable certificates of deposit (NCDs) well before their contractual maturity.
“At the heart of the challenges experienced are behavioural assumptions that did not hold up. Risk management and prudential regulation, however, are both built on behavioural assumptions. The liquidity coverage ratio, for example, is built on assumptions of likely stressed outflows over a one-month time horizon.
“But what about when those assumed stress flows prove inadequate? And what about liquidity needs sitting just beyond the one-month window? Both are issues on which we need to reflect on and consider whether – without seeking to raise requirements – we can adjust the framework to make the system more resilient to liquidity stress.”
