SCT reveals post-GFC fund illiquidity issues

The degree to which illiquidity issues hit some superannuation funds, particularly those with high exposures to unlisted investments, has been driven home in a recent determination by the Superannuation Complaints Tribunal (SCT).

The determination relates to a complaint by a superannuation fund member that she was unable to persuade the fund to roll-over her balance to another fund for nearly four years between 2009 and 2013 because of the illiquid nature of the fund strategy she had invested in.

The evidence considered by the SCT clearly portrays a situation which evolved throughout the global financial crisis (GFC) and beyond during which the Australian Prudential Regulation Authority (APRA) granted multiple requests from the fund to defer processing redemptions.

The APRA approvals were granted as the fund was issuing notices to its affected members that some mortgage loans within the Balanced Investment Strategies had been affected by the GFC, thereby impacting the overall liquidity of the strategies.

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Evidence provided to the SCT showed the fund had told affected members that: "The further sale of liquid assets (such as shares) in the Balanced Investment Strategies to fund member redemptions, poses the risk that remaining members will become exposed to an unacceptable and unfair concentration of affected assets".

Later updates to members said the asset classes held included "direct mortgage loans, unlisted mortgage trusts, cash, and bank term deposits originating from the Balanced Investment Strategy".

The superannuation fund member had asked the SCT to order the complete release of her funds immediately, a complete refund of all fees and an investigation of the fund to ensure no other members were being taken advantage of.

However, the SCT determined the fund had acted appropriately in not moving to transfer the members' funds to another superannuation fund.It noted the Trustee had a fiduciary duty to administer the Fund in the best interests of all members.

"The Tribunal was satisfied that the Trustee decision to not allow redemptions from the Strategy, when it recognised the problems with its liquidity, was fair and reasonable in the circumstances," the determination said.

"In the opinion of the Tribunal the Trustee acted to safeguard the investments of all members of the Strategy rather than redeem liquid assets to pay members who wished to transfer out of the Strategy. The Tribunal considered this approach to be fair and reasonable, ensuring the assets of remaining members were not unfairly affected by reducing values and market movements."