Pandemic Highlights Risks of Industry and Retail Funds
The COVID-19 pandemic has placed renewed focus on the Superannuation industry and the advantages and disadvantages between Industry Funds, Retail Funds and Self-Managed Superannuation Funds (SMSFs). There are signs of renewed interest in the SMSF sector after a few rebuilding years, post-Royal Commission, where advisers and SMSFs were heavily scrutinised and major reforms were put in place. Industry and Retail Funds managed to escape the Royal Commission unscathed, however recent events have brought to light underlying issues in the sector.
During the 2008 Global Financial Crisis, many superannuation investors pulled money out of the super system, which forced fund managers to sell assets to pay out cash to the investors who wanted their money back. We are now seeing history repeat itself because of the pandemic and the early access to Super initiative introduced by the Australian Government. Early access payments are currently estimated at over $30 billion – according to the Association of Superannuation Funds of Australia (ASFA) roughly 65% of early release payments have been made by Industry Funds and 29% by Retail Funds. Unfortunately, these market downturns are the worst possible time for these funds to sell assets and results in a negative impact on the value of the funds.
Markets became volatile in March causing anxiety with investors. The pandemic identified potential gaps in Industry and Retails Funds stress tests for major events, including liquidity. The industry was caught by surprise by the Government’s financial hardship and early release of super policy changes. Funds that invested for the long-term in unlisted investments like airports, construction, infrastructure, now faced a liquidity challenge. The Assistant Minister for Superannuation, Jane Hume, stated that the Coronavirus crisis exposed structural weaknesses in Australia's retirement savings system and shows the urgent need for the industry to consolidate. The pandemic has highlighted the heavy concentration of some funds, whose membership is drawn from industries such as tourism, retail or hospitality. This has left them vulnerable to the widespread layoffs impacting those sectors.
SMSFs have a distinct advantage in the current climate. The retail super fund sector contracted up to 12% compared to 9% for SMSFs during the March quarter. Trustees of an SMSF are impacted by their own investment decisions and are not at the mercy of the Industry and Retail Trustees’ decision making. The aforementioned liquidity and diversification issues can be managed by the SMSF Trustees and their member balances aren’t directly impacted by the billions of dollars being withdrawn from the other Super sectors.
The COVID-19 pandemic has forced millions of Australians to take notice of their superannuation and retirement savings. If you want to take control of your retirement and are considering an SMSF please contact the team at PKF.