Super funds need to review liquidity budgets

Superannuation funds and their investment committees will need to think about their liquidity budgeting differently as a result of the early release of super scheme, according to Hesta.

Hesta chief investment officer, Sonya Sawtell-Rickson, spoke at the Association of Superannuation Funds of Australia (ASFA) Conference today and said while in the moment it was the right scheme as it helped a number of households, there was now a broader challenge of purpose and longevity on the retirement income system.

“Super was setup for retirement income and to help intergeneration inequities in the system. Early release feels a little bit contrary to that,” she said.

“However, it was an extreme event and allowing people to access super in times of financial distress has helped a number of households.

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“When I think about the liquidity impacts, obviously timing is everything and a lot of super funds were seeing switching to lower risk options which created liquidity demands, they were seeing falling Australian currency which created liquidity demands on their hedges, and in addition to having early release on top it obviously added to that liquidity stress to funds.”

Sawtell-Rickson said now the challenge was investment strategy.

“As we think about the future, if early release is now a new tool that is available and likely to be used in the most extreme situations when markets are likely to be in stress, suddenly we need to think about our liquidity budgeting differently,” she said.

“The implication is that, all things being equal, most funds investment committees will be reflecting on this experience and considering their liquidity requirements going forward.”

With the COVID-19 pandemic and central banks injecting huge amounts of liquidity into the system which pushed cash rates globally to negative real yields, Sawtell-Rickson said funds now needed to generate more real return from risk assets.

She said this made the job of an asset allocator more difficult as it would not be enough to just allocate to, say, real estate but instead allocators needed to think about which sectors within real estate were going to deliver strong returns and which were not going to deliver the returns the fund needed.

“I think asset allocators have to think more deeply about diversification,” she said.

“With bond yields so low we can no longer rely on bonds as our main diversification strategy in the portfolios.

“Asset allocators have to think about things like currency and their roles as diversifiers or synthetic allocations.

“Asset allocation is going to be more important and risk budgeting a much more disciplined process in the asset allocation framework.”