Early drawdown not so super, funds warn

Retrenched workers cashing in superannuation now will leave many millennials struggling in retirement and prompt fire sales.

Superannuation lobby groups have ramped up opposition to Scott Morrison and Josh Frydenberg’s crisis plan to allow retrenched workers to access up to $20,000 worth of savings from super funds, warning such a move could drain the $500bn default MySuper sector of its cash and spark liquidity problems.

In a letter sent to Treasury last week, the Association of Superannuation Funds of Australia, Industry Super Australia and the Australian Institute of Superannuation Trustees said expected drawdowns of up to $65bn could exceed the industry fund-dominated MySuper sector’s cash ­reserves of about $45bn, forcing funds to engage in a fire sale of ­assets to cover payouts, which would harm the investments of remaining members’ assets.

“There’s a really good chance a lot of smaller funds will really struggle with this,” said an industry source with knowledge of the letter.

The government over the weekend amended its guidance for early access to super, meaning that savers only need to give the tax office their bank account details and apply for the drawdown through the government revenue agency via the my.gov.au website.

This took the heat out of one of the complaints of the $750bn industry fund sector: that many funds lacked the operational capability to administer drawdowns. But there are still concerns about the ability of some funds to remain solvent in the face of drawdowns, and the ­industry is lobbying for the extension of Reserve Bank intervention in the financial system to support super fund liquidity.

Most small industry funds attain a cohort of savers through industry-specific enterprise bargaining agreements, meaning membership can be concentrated in sectors that have been hammered by the government shutdown aimed at arresting the spread of COVID-19, such as the retail, hospitality, clubs and tourism sectors.

Moreover, some funds are heavily weighted towards younger super members, who may be more willing to dip into meagre retirement savings.

Intrust Super, a $3bn industry super fund managing the savings of young workers in the shuttered hospitality, retail and tourism sectors, lashed out at the government’s early super release plan as “one of the greatest ideas in portfolio destruction”.

Brendan O’Farrell, the chief executive of Intrust, said his fund had adequate liquidity.

He said the fund’s contact centre has experienced an increase in calls of about a third, with the main question being the status of insurance in the event members withdraw all their savings, as this would put the accounts below a $6000 limit where insurance is automatically removed after 13 months.

“As you would expect upon account closure your insurance would become void — creating another unintended consequence,” he said, adding the government should provide further support to workers so they didn’t have to resort to dipping into their super.

“We believe this is not a super fund problem in the first place,” he said.

“Super is for the long-term — not to be used in the short term as an ATM machine.

“This is one of the greatest ideas in portfolio destruction I have seen in a long time.”

The Australian Prudential Regulation Authority has held talks with a number of super funds about their liquidity, both in respect to drawdowns and to other factors affecting their cash flow.

According to an analysis by industry consultancy Rainmaker, 56 per cent of Intrust Super accounts were held by millennials, making up 26 per cent of the fund’s asset base.

Guild Super, which manages the savings of workers in the childcare and pharmacy sector, has almost 70 per cent of its accounts held by millennials, accounting for 42 per cent of its funds under management.

About 64 per cent of REST Super’s accounts are held by millennials working in the retail and hospitality sectors, accounting for a third of all assets.

Just under 60 per cent of Hostplus’s members are millennials, who hold 25 per cent of the fund’s assets.

Rainmaker head of research Alex Dunnin said it was “no surprise funds like Hostplus, Intrust, Sunsuper and Rest are so heavily tilted to young members”.

“This has been their strength. It could now test them,” Mr Dunnin said.

“Before passing judgment we need to see what actually happens.

“The bigger concern is superannuation products that have deliberately and explicitly focused on younger, low-balance members such the newer app-based disrupter products that have launched in the past two to three years.”

First State Super CEO Damian Graham said he did not believe the Reserve Bank of Australia needed to step in to help the super sector.

“We are of course monitoring the changing environment and risks carefully and if the current situation changes we would support the RBA’s involvement in this area,” Mr Graham said.

Last week, two industry funds, MTAA and Tasplan, said they would delay their merger because of market volatility — raising the prospect that other tie-ups could be deferred or scuppered.

“The First State Super and VicSuper merger is still on track but we are continuing to monitoring the environment and risks carefully,” a spokesman for VicSuper said.