Superannuation funds should embrace reality

While not one Australian superannuation fund has collapsed or been suspended during the global financial crisis that does not mean they have emerged unscathed or that they should resist the need for change.

It is testimony to the Australian superannuation funds industry and the underlying regulatory environment that, to date, not one superannuation fund has collapsed or been suspended during the global financial crisis (GFC).

Given the importance of superannuation as the largest investment most Australians will ever make, both the Government and the Australian Prudential Regulation Authority (APRA) understand that the relative stability of the sector over the past 18 months is a prize beyond price.

Both would acknowledge that the mere hint of a super fund failure would have serious consequences.

That said, it would be wrong to suggest that all Australian superannuation funds will emerge unscathed from the GFC or that APRA has not had cause to be concerned about some funds, particularly where liquidity and resourcing are concerned.

The regulator has confirmed that a number of funds have sought relief on liquidity grounds over the past 12 months, with at least one fund returning to APRA seeking an extension of that relief.

With good reason the regulator has not named the funds that have sought relief, but a perpetual rumour mill has ensured that the same names keep being discussed.

Would publicly naming the funds serve any purpose beyond creating some industry schadenfreude?

Probably not. It would simply serve to erode confidence in the affected funds when, in all probability, most are probably experiencing only a technical deficiency with respect to liquidity.

In most instances the liquidity issues being confronted by funds are a product of the freezing of redemptions on mortgage and property funds and, in one or two instances, managed investment schemes.

As the market strengthens and the Government moves to address the question of the bank guarantee, the situation can be expected to return to normal.

The essential obligation of trustees is to seek from APRA relief from meeting their 30-day portability requirements in circumstances where they cannot accommodate internal switching between investment options or pay lump sum benefits.

Then, too, there has been the impact on funds that have found themselves overly exposed to unlisted assets and which have not satisfactorily moved for the repricing of those assets.

In circumstances where the markets have appeared to be steadily recovering over the past five months, APRA appears to have been correct in its assessment that for most of the funds, their liquidity issues represent a passing anomaly that will correct itself as the broader market recover.

What the regulator therefore can ill-afford is a double-dip recession wherein superannuation investment returns re-enter negative territory for a significant portion of the current financial year.

Two years of negative returns have deeply scarred many Australian investors, two and a half years would prove even more damaging and place further pressure on the funds that have thus far failed to meet their liquidity requirements.

The reality for APRA is that it is walking a fine line in dealing with such issues. On the one hand it cannot afford to be seen to be denying fund members vital information, nor can it risk undermining confidence or creating panic.

APRA’s chairman John Laker explained at least a part of the regulator’s rationale in an address to the recent Investment and Financial Services Association conference on the Gold Coast when he said that a part of its role “is to promote confidence in the soundness of financial institutions and in the financial system more generally”.

Given the realities that have confronted trustees through the global financial crisis, it is to be hoped those worst affected recognise the shortcomings that led them to seek relief from APRA and how the best interests of their members will ultimately be served.

While trustees are almost invariably resistant to mergers and amalgamations, recent events are proof that a lack of scale, poor investment strategies and poor risk management have left some with few realistic options.

While the global financial crisis may not have sunk a superannuation fund, it should have persuaded some trustees to head for the lifeboats provided by bigger and more affluent funds.