The International Monetary Fund has raised concerns about liquidity risks within Australia’s superannuation system due to a growing share of illiquid investments, such as private equity and credit.

In its latest Global Financial Stability Report, the IMF warned that Australian super funds, which are increasingly allocating over 20 per cent of their assets to illiquid investments, face significant stability risks.

“Australian superannuation funds are required to allow clients to switch between different investment options generally within three business days, even though these funds hold, on average, illiquid exposures exceeding 20 per cent of their total assets,” the IMF said.

“This liquidity mismatch could affect members’ outcomes in a liquidity stress event.”

While this trend is a threat to member outcomes, it could also trigger spillovers into broader financial markets, the IMF warned, especially in those markets in which pension funds and insurers have a large footprint.

According to the IMF, nearly one quarter of total assets in five major Australian super funds are tied up in illiquid investments.

While it acknowledged that Australian regulations mandate that funds manage liquidity to accommodate client switching, it said the rising proportion of illiquid assets heightens the potential for disruption, with similar trends being observed globally.

“There is some evidence that this type of liquidity mismatch is on the rise,” it said.

“Selected large private defined-contribution pension and superannuation funds have increased the amount of their assets allocated to illiquid private equity and credit in recent years, and several countries have recently introduced initiatives to encourage further allocation to illiquid investments.”

Last month, the Reserve Bank of Australia (RBA) flagged the growing importance of the country’s super sector to financial system stability due to both its size and its connections to banks.

The central bank acknowledged that the closed, long-term nature of the super sector helps limit systemic risks but cautioned that its rapid growth – now accounting for a quarter of Australia’s financial assets – along with its growing ties to banks and influence in financial markets, poses new risks that could amplify economic shocks.

“A recent illustration occurred during the onset of the pandemic in Australia when superannuation funds increased their sale of bank debt securities back to issuing banks, adding to bank funding pressures – which, in turn, increased funding costs across the financial system,” the RBA said.

Similarly to the IMF, the central bank highlighted the possibility that sudden liquidity demands – such as capital calls on private assets, abrupt policy changes, or margin calls on FX hedges – could trigger rapid, synchronised asset sell-offs in domestic markets as funds scramble to raise cash.

Cbus warns of danger of dismantling system

In response to the IMF’s concerns, Cbus Super chair Wayne Swan emphasised on Wednesday the danger of dismantling the current system.

Framing the IMF’s statement within the context of the Coalition’s plan to expand early access to super for first home buyers, Swan responded to the media frenzy surrounding a recent comment made by shadow treasurer Angus Taylor, stating that a move to a 401(k) system would be “reckless”.

Earlier this month, reports emerged that Taylor is contemplating dismantling Australia’s compulsory super system to align it with global retirement schemes, particularly the US 401(k) model.

“The Coalition has started by aligning superannuation with other global retirement schemes – like 401(k) – that allow withdrawals for the purpose of purchasing a first home,” Taylor said at an event in Sydney.

However, speaking to InvestorDaily, Association of Superannuation Funds of Australia CEO Mary Delahunty said Taylor’s sentence was clearly taken out of context.

“The full sentence makes it clear that that reference to the substandard American system is drawing a comparison to the Coalition’s policy on early access,” Delahunty said. “Broadly, it’s not Coalition policy.”

But while Taylor’s comment may have been misunderstood, Coalition members have previously argued for a more flexible super system that enables Australians to make voluntary contributions based on their individual financial circumstances. Senator Andrew Bragg has been the most vocal proponent of this idea, advocating for a voluntary superannuation system in public and in his book, titled Bad Egg: How to Fix Super.

Underscoring the crucial role superannuation has played in stabilising the economy during past crises like the Global Financial Crisis and COVID-19, Swan said on Wednesday this protective effect hinges on funds having the confidence to invest for the long term.

“Dumping the preservation principle would likely lead to short-term market impacts, and the long-term result would be lower and more volatile returns for every Australian’s savings for retirement,” the Cbus chair said.

“Over the last 40 years, we have built super into one of the world’s leading retirement savings systems. Policymakers need to be mindful of the impacts reckless actions can have on markets, returns and the productivity of the Australian economy.”

Read more @superreview