An extra $27 billion of cash could be withdrawn from the superannuation system than what Treasury has estimated from the early access to super scheme, according to Rice Warner modelling.
An analysis by the research house said it estimated $40 to $50 billion would be withdrawn from the super system under the new early access scheme for super members under financial hardship due to COVID-19 impacts.
This is close to double the Treasury’s estimate of $27 billion, or 1% of all assets held in super.
Rice Warner said its estimates reflected expectations that the level of unemployment had grown since Treasury first modelled the withdrawal level.
“While most funds will have strong cash flows and cash balances, the withdrawals will reduce cash for reinvestment in assets with depressed market prices,” it said.
“For the 25% of funds which will lose up to 10% of their members, a reassessment of cash flow, liquidity and asset allocation will be critical.”
Rice Warner noted that some industries had been hit very hard, particularly tourism, retail shopping (apart from supermarkets), and hospitality.
It said: “Some funds have a high portion of members from these industries so they will bear a disproportionate share of the impact – and will be felt in several ways:
They will pay out large unplanned benefits (resulting in members capitalising investment losses);
Many members with small balances will exit the fund completely; or
The cashflow from superannuation guarantee (SG) contributions will be significantly reduced from sudden high unemployment.”
While taking $20,000 tax-free from super for those under financial hardship seemed appealing, Rice Warner said there were some downsides which included:
Those who end up exiting the fund will forfeit their life insurance;
The withdrawals will come at a time when asset prices are low, so the members will be capitalising losses rather than waiting for a rebound; and
Many members will not make up the withdrawal later and that will result in lower retirement benefits (up to $120,000 for a twenty-year-old according to Industry Super Australia figures).
It said super funds needed to go above and beyond to engage members. By doing this, and by providing tools and information that were required to make decisions, funds would ensure that irrespective of short-term volatility the retirement of members would remain healthy.