Financial planning around superannuation may be forced to change as a result of the impact of COVID-19 and the efforts of superannuation funds to increase their cash holdings, according to actuarial research house, Rice Warner.

It said superannuation funds are likely to keep high levels of cash well into the future for fear of a repeat of the Government’s COVID-19 hardship early release regime.

In an analysis of the impact of COVID-19 on superannuation funds, Rice Warner has pointed to the liquidity issues which have already faced funds but expressed relief that, at this stage, none appeared to have gone to the Australian Prudential Regulation Authority (APRA) seeking approval to cease rollovers due to illiquidity.

“Most funds will manage, but some operate for members in industries with high levels of unemployment,” it said.  “As JobKeeper does not allow for any superannuation contributions, the regular cash flow has been severely disrupted.  None of this could have been foreseen.”

“The heavily-impacted funds might need to sell some assets to support their cash flows.  Not only does this mean selling at depressed prices, but it reduces the scope to buy other discounted assets as they become available,” Rice Warner said.

“Fortunately, we are not aware of any funds that will need to ask APRA for approval to cease rollovers due to illiquidity (Section 6.36 of the SIS Act).

“One of the implications of the Early Release scheme is that funds will hold more money in cash (earning very little).  They will be worried that this precedent could be repeated, and they need to be better prepared.

“Superannuation funds with a significant proportion of members in those industries most affected at the moment (such as hospitality, retail and tourism) may seek to attract more members in other areas as well as building up membership of their account-based pensions.  This will provide an increased buffer against another one of these (hopefully) one-in-a-hundred-year events,” the Rice Warner analysis said.

“Over the next decade, the superannuation industry is not likely to have the same earnings pattern as enjoyed over the last 20 years,” it said.

“This will mean new targets,” the analysis said and questioned whether Consumer Price Index (CPI) plus 3% to 4% will remain viable over the next ten years?

“Perhaps it will be if CPI is negative for some of this time,” it said.

“If targets are reduced, that will flow into communications material, online calculators and financial advice models. It will also reduce projected future retirement benefits for members and possibly reduce confidence in the system, despite its clear value for most Australians.

“It is also fair to say that forcing superannuation funds to hold more liquidity in anticipation of another unexpected Government requirement will reduce the long-term earning capacity of superannuation and eventually lead to lower tax revenue and higher Age Pension costs.

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