Rachel Alembakis looks at the challenges faced by Australia's super funds as they face up to the worst returns in 20 years
The poor one-year figures present two challenges to the superannuation industry - first, how to adequately explain these results to members in the context of retirement savings as a long term project, and secondly, whether funds are prepared for the consequences if members decide to withdraw their assets from one fund in order to transfer to another.
Superannuation minister Nick Sherry has warned that in response to annual statements reporting poor one-year returns, members could exercise their right to switch superannuation funds, a move that, in extremis, could threaten the liquidity of superannuation funds. In a speech in May, he said:
'[Some] fund members will be concerned that the current market volatility will translate into lower superannuation returns. Equally, funds may fear that these short term fluctuations will make their members more sensitive to their fund's performance, and therefore more willing to switch funds.
'The ability of employees to utilise portability and select a super fund for contributions gives them the ability to switch their savings to another fund. It's also true that a significant amount of switching could put the liquidity of an unprepared fund at risk.'
Sherry then said he had asked the Australian Prudential Regulatory Agency (APRA) to monitor funds' liquidity, a move that APRA has subsequently taken by asking funds to report on their liquidity levels.
The superannuation industry believes that while liquidity risk is worth discussing, particularly for funds that have significant allocations to less liquid or illiquid assets like private equity or infrastructure, it is unlikely that a 'run' on superannuation fund assets is likely to happen.
'We're not overly concerned about it,' said Fiona Reynolds, CEO of the Australian Institute of Superannuation Trustees (AIST). 'It is an issue that obviously APRA is keeping an eye on. APRA want to make sure that trustees have in place appropriate measures to have correct ongoing liquidity management. This would include obviously careful monitoring of cash inflows and outflows.'
Impact on liquidity
But even if a mass exodus does not happen, an uptick in switching could still have a profound impact on liquidity and asset allocation. Since legislative changes in 2005 that have permitted members the right to choose their superannuation fund and switch from one fund to another, 3% to 5% of superannuation fund members have changed funds, according to a July report by Deloitte Consultants & Actuaries.
This 3% to 5% switching rate in three years of very high annual returns for superannuation funds represents A$30bn per year. If those rates go up in the next year because of poor superannuation figures, the impact on funds' liquidity and their asset allocation could be profound.
'We have been going through this issue with our clients,' said Andrew Boal, managing director, Watson Wyatt. 'Let's say there is a fund that has gone for a 25% allocation into illiquid assets, with 75% in liquid assets. If that fund had 10% of its members, by assets, taking their money out in the short term, then that would alter the weightings it has in its portfolio such that the illiquid assets would increase to 28% of the portfolio.
'That might be okay if, in setting its asset allocation, the fund gave itself a target range of plus or minus 3%. But say if 18% of its members, by assets, wanted to leave, then its 25% asset allocation to illiquid assets would hit 30%, which could be above its ceiling and as a result require the fund to start selling its illiquid assets.
'At that point in time, the fund may have to go to APRA to seek relief on making payments for a period of time, or to allow the fund to move outside its investment allocation ranges temporarily.'
However, at least one superannuation fund with a highly illiquid portfolio has said it is prepared for this by having instituted a liquidity policy to maintain sufficient reserves to balance the risk of investing in illiquid vehicles.
The Motor Trades Association of Australia Superannuation Fund (MTAA Super), a A$6bn non-profit fund, has, since the late 1990s, maintained two distinct investment portfolios. Its Market-Linked Portfolio invests in shares, fixed income and cash, while its Target Return Portfolio (TRP) is invested in 'unlisted assets such as airports, tollways, ports, power stations, timber, power generators and private equity', according to its website, plus property such as 'landmark government buildings'.
Members are offered nine differing options with various weightings of the TRP in each option. For example, the default balanced option had an actual asset allocation in 2006-07 of 42.2% to the TRP, 29% to Australian shares, 24.4% to international shares, 3.3% to cash and 0.6% each to Australian and international fixed interest. For the 2007-08 financial year, the balanced portfolio returned -2.13%.
'Liquidity is clearly an issue that is uppermost on our minds,' said Leeanne Turner, deputy executive director of MTAA Super. 'It's something we take seriously. We have a stringent liquidity policy to deal with the issues. We share APRA's views, but we feel we're equipped to deal with it.
'For liquidity to become a problem in its most basic sense, you've got [to have] more money going out than coming in. That's not the case for the fund.'
However, Turner said that because of declines in the Market-Linked Portfolio, the asset allocations in options have reached the upper targets for the TRP. Turner noted that for the balanced option, the TRP currently constitutes 48% of the total portfolio, which is the limit as fixed in the asset allocation.
For the moment, the fund does not have to take immediate action, but it does prevent additional investment to build the TRP because that would tip the value of the TRP too high under their strategic asset allocation.
'We've got ranges and we monitor that closely,' she said. 'It depends on what's happening out there. We're at the upper end of our TRP. That curtails taking on new opportunities in the unlisted space.'
The big challenge for superannuation funds in the wake of the 2007-08 returns is to properly explain the results, put them in the proper context of long term savings goals and assist and advise members who do wish to make changes.
'The one that most people spend the most time with is the annual statement - that's the one that people are most interested in. There will be negative returns, and probably the biggest negative returns since the superannuation guarantee started in 1992,' said Jason Marler, director of business strategy and operations at Russell Global Investments.
'We are giving the message with guides, with the statements, with graphs, and it will be very clear to people that their actual balances have gone backwards. We are managing the message around that about the market cycles and being alert but not alarmed.
'On our statements and guides, we're also using some charts on the Australian share market as an example; in each of the four years to 30 June 2007, we had 20% plus returns. Putting the last 12 months in context, we were still double digit returns per annum over five years in Australian shares.'
While the annual statement may be the biggest written communication from a superannuation fund, call centres are also playing their role. Many superannuation funds have been training their call centre workers with new scripts to respond to the negative results.
'A number of funds have been running sessions for call centre staff to make sure they are prepared for those questions,' said Reynolds of AIST. 'The funds are focusing on the long term, and how to effectively communicate those things. I know a number of funds have upskilled and put on more people.'
Boal of Watson Wyatt says his firm has been advising its clients to get the message out front to its members before the annual statement is released.
'Get the message out there sooner rather than later - don't wait for the annual report or benefit statement to be the first notice of this year's poor returns,' he said.
'Obviously, the positioning and focus should be on long term performance. Funds should be clearly communicating that poor performance in the short term is quite normal, especially if you're positioning the fund for success in the long term.'
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