APRA eyes rising role of super funds in the economy

APRA chair John Lonsdale. Picture: Chris Pavlich

In 2020, when the federal government announced it would allow people to take money out of their super funds to help them get through the pandemic, there were a few people in the sector worried about its implications for the liquidity of the system.

While the amount of individual withdrawals was limited to $20,000 and, in the end, not too many people decided to take their money out, there was a concern about how it might affect some funds and whether there was a need for funds to be able to access some sort of Reserve Bank liquidity process in cases of emergency.

In the end it didn’t happen, and the system managed things well, but it is significant that the Australian Prudential Regulation Authority is now looking at the broad implications of the rising importance of the superannuation sector for financial stability.

APRA has conducted stress tests of the banking system for some time to look at the system’s ability to respond to a crisis, but its chairman, John Lonsdale, indicated in a speech this week that it wants to take a broader look at the system in future.

Lonsdale said APRA was now looking at the implications of “the rise of superannuation as an economic force”.

There is currently $3.7 trillion in the super fund sector, an amount equal to 140 per cent of GDP.

It includes $1.3 trillion in industry funds, $915bn in self-managed super funds and $713bn in retail super funds.

All this before the super fund guarantee rises to its maximum of 12 per cent of salary in July 2025, which will continue to ensure that billions of dollars of new funds flow into the system each year.

The system is projected to be as large as $13.6 trillion by 2048, the Association of Superannuation Funds of Australia says.

In his speech, Lonsdale said “the banking industry remains the cornerstone of Australia’s financial system, but that status is increasingly being challenged by superannuation”.

“Over the past decade, the value of assets managed by the superannuation sector has grown at almost double the rate of banking – 8.8 per cent a year, compared to 4.8 per cent,” he said.

“If this trend continues, superannuation assets will exceed the size of the banking sector in time.”

The rise of the sector, he said, was “another major factor contributing to the need for banks’ stress-testing to take a more system-wide view”.

Just how APRA plans to expand its stress-testing beyond the banks to take in the superannuation sector next year is not clear.

Lonsdale said APRA was “considering both the design of this new system-wide test and how it might be rolled out”.

For the super funds, it is a case of “watch this space”.

BlackRock chairman and CEO Larry Fink. Picture: John Feder

But Lonsdale’s speech makes important points in terms of looking at the broader implications of the rise of super funds and their “interconnectedness” with other parts of the economy.

“Consider the commercial property market,” he said. “Banks lend to it, super funds invest in it and insurers underwrite it.

“Should we see a major correction in commercial property valuations, all three industries – banking, super and insurance – would be impacted. Climate risk is another interrelated area.”

Lonsdale noted that an increasing number of householders are being hit by natural disasters and the rising cost and availability of property insurance.

“This impacts the ability of households and businesses to get credit, to rebuild after a disaster or to repay loans, and might also impact super though requests for early releases on compassionate grounds,” he said.

While the system is growing, he said superannuation “doesn’t need to be bigger to have an influence over financial stability”.

While Lonsdale’s job is to worry about the ability of the banks, super funds and insurance companies he regulates to withstand shocks – his speech speculated on the risk of “contagion” from an international or domestic crisis spilling over into the superannuation and insurance system as well as the banks – the super system has played an important role in making the financial system more stable.

When the banks turned to the capital markets in the wake of the Global Financial Crisis and then again with the advent of Covid, it was the super funds that were able to step in with the big cheque books and subscribe.

As a report by IFM Investors just released notes, super funds have been big investors in infrastructure assets for decades, becoming major investors in infra­structure here and offshore.

IFM, which was set up by the nation’s major industry super funds in 2004 as a collective investment vehicle, now has $100bn in infrastructure investments globally in 20 countries.

Super funds are now becoming important sources of capital for renewable energy and energy transition projects as well as affordable and social housing developments.

They are also increasingly becoming involved in private credit – providing funds for companies in an alternate form to bank lending including venture capital funds.

In his annual letter to investors this week, Larry Fink, the co-founder and chief executive of US funds management giant BlackRock, which oversees $15.3 trillion in funds, talked about the importance to the financial wellbeing of a country to have a developed capital market outside the banking system.

In the US, the multitrillion-dollar funds management sector, which is outside the banking system, has been a driving force behind its deep capital markets, which Fink argues allowed the US to rebound from the GFC faster than almost any other developed country.

In Australia, the rising pool of super fund money has underwritten the growth of the capital market in a country that was once a large importer of capital, and has also been an important factor in the nation’s financial resilience.

The super system is evolving with more emphasis being placed on the retirement side of the equation as well as the need for higher levels of customer service as members age.

But super funds are very different to banks – they are not leveraged like banks, and it is not possible to have a “run” on a super fund in the same way as one could have a run on a bank.