APRA confirms super early release did impact super fund liquidity

The Australian Prudential Regulation Authority (APRA) has confirmed that some superannuation funds did face liquidity issues due to the Government’s COVID-19 hardship superannuation early release (ERS) regime.

What is more, the regulator revealed that those liquidity issues were relieved when the funds transferred some of their investments into cash.

APRA had also confirmed the degree to which members potentially adversely impacted their super balances by switching investment options at the height of the COVID-19 market volatility.

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The liquidity problem has been revealed in APRA’s latest bulletin and represents the first time the regulator had formally confirmed the existence of the liquidity issues.

“The data shows that during the first two weeks of the ERS – in late April and early May 2020 – over $6 billion of Australians’ retirement savings were withdrawn by superannuation fund members,” it said.

“While this placed significant liquidity pressure on a small number of funds, the movement of some investments to cash by the industry in the March quarter largely mitigated any potential liquidity concerns for superannuation funds.”

It said that during the March quarter, the actions of trustees and individual members saw an increase of more than $50 billion in cash held through members’ retirement savings, representing an overall increase to cash across the industry of 4%.

The regulator said the timing of members’ switches “potentially had significant impacts on their retirement balances, due to the volatility and large swings observed in financial markets between late February and June 2020”.

“This volatility was particularly seen in listed equity markets. For example, the ASX 200 experienced a 37% drop in late February and March, followed by a 35% rebound from late March to early June. Some members may have timed the market well and preserved their retirement balances. But many more are likely to have switched at the wrong time after markets fell, and switched back after markets were already in recovery,” it said.

What is more APRA pointed to superannuation funds themselves clinging to cash, noting that “despite some easing of the pressure to hold cash or cash-like assets in the June quarter, trustees continued to hold higher levels of cash at the end of the quarter than in previous periods, with cash assets accounting for 13.2% of industry investments as at June 2020, compared to 9.5% in December 2019”.

“This ensured adequate levels of cash were available to meet the second tranche of the ERS and to respond to continued volatility in the COVID-19 environment. In the first two weeks of July 2020 (the second tranche of the ERS), Australians withdrew a further $7 billion of retirement savings. Cash holdings have subsequently reduced, falling to 11.9% of industry investments as at September 2020,” it said.

The APRA confirmation of liquidity challenges came at the same time as superannuation administrator data has pointed to the ERS having created record numbers of sub-$10,000 accounts.

According to data compiled by superannuation administrators even the least-affected funds now have around 3% members with balances below $10,000 while some of the worst-affected funds have up to 15% of accounts now regarded as low balance.

The consequence of the low balance accounts is that the members lose their access to insurance inside superannuation and risk having their balances swept up by the Australian Taxation Office (ATO) under the Government’s Protecting Your Super legislation unless they ensure it remains active via new contributions.

However, for the time being at least, low balance superannuation fund members are regarded as being in safe territory because their use of the Government’s early release regime means that they met “a prescribed condition of release”.

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