As published on theguardian.com/australia-news, Friday 27 March, 2020.
Superannuation funds have asked the government for taxpayer backing to help them meet withdrawals by members without being forced to sell assets, as the coronavirus crisis sparks one of the worst sharemarket routs in the past 100 years.
But sources said that so far the treasurer, Josh Frydenberg, has rebuffed the proposal for a “liquidity backstop facility” designed to protect funds from taking heavy losses due to a large number of people withdrawing money because they have lost their jobs due to government restrictions.
Guardian Australia understands there are fears within the super industry that withdrawals will be much higher than estimates of $25bn to $27bn that were circulating this week.
The industry super funds, which tend to have a higher proportion of their assets in harder-to-sell but more lucrative unlisted assets such as roads and ports, have led the push for the facility.
For-profit funds represented by the Financial Services Council do not support the proposal.
Industry sources would not say how big such a facility would need to be, but to be effective it would need to be able to soak up some of the tens of billions of dollars of withdrawals expected under rules announced on Sunday by Frydenberg allowing people who have lost income due to the pandemic to redeem $10,000 before 30 June and an additional $10,000 after that.
Earlier this week, the Actuaries Institute estimated that 1.35m people could withdraw as much as $25bn, and Frydenberg’s office estimates up to $27bn may be released.
However, industry sources say modelling by super funds indicates as many as 3 million people could be eligible to make a withdrawal, with the total amount taken out likely to be more than $30bn, and as much as $60bn in the most extreme scenario.
Sources across the industry said no fund was in danger of collapse, but if funds were forced to sell assets it would hurt returns for all members, not just the ones making a withdrawal.
It is believed super funds and industry bodies were working on a proposal for a liquidity backstop facility even before Sunday’s announcement by Frydenberg.
More than one model of how it could work has been put to Treasury, the Reserve Bank and regulators including the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, an industry source said.
One proposal is understood to be that the Reserve Bank could lend the money to the facility against assets mortgaged to it by the funds.
However, another industry source said the regulators and Frydenberg’s office were not interested in backing any kind of liquidity backstop facility.
“It’s just a complete no-go,” the source said.
Asic and Apra declined to comment. The RBA did not respond before publication. A spokeswoman for Frydenberg did not answer Guardian Australia’s questions about the treasurer’s attitude towards the proposal.
An FSC spokeswoman said the body “supports the move to allow temporary access to superannuation but does not support special liquidity facilities for super funds”.
Frydenberg’s spokeswoman said super funds had about $300bn in cash.
But industry sources say the cash is unevenly distributed across funds, and some may be forced to sell assets if they experience a flood of withdrawal requests.
There are also concerns about how assets are allocated within the sub-funds, or “options”, such as “balanced” or “conservative”, into which members tip their retirement nest-eggs.
Each option promises members it will invest a certain proportion of their money in each of several different types of assets, such as cash, stockmarket-listed shares, property or infrastructure.
One source with deep experience of modelling super fund returns said that if an option was forced to sell assets to fund cash withdrawals, this could mean it had to sell other assets to make sure it kept this asset allocation promise – all while markets are at lows not seen since 2016.
The source raised concerns that Apra did not have a good enough understanding of how the withdrawals would affect individual options, because the regulator’s analysis was primarily done at a fund level.