Super fund consolidation beckons

Some super funds like Hostplus draw members largely from one industry. Picture: AFP

When earlier this week a number of industry superannuation funds asked Treasurer Josh Frydenberg to authorise the government or the Reserve Bank to underwrite their liquidity to meet an estimated $27 billion in withdrawals, they must have known the almost certain consequence: APRA intervening to discover what has gone wrong.

How could a $20,000 payment to stood down employees have required a superannuation request for help and threaten the Australian sharemarket? And it’s clear that there is a threat to the Australian share market.

As I moved around the markets to try and learn some of what APRA would discover (assuming they undertake the task), I uncovered a sad story of currency bungles combining with a “perfect storm”. I emphasise that not all industry funds are affected same way.

Industry superannuation funds like AustralianSuper and Sun Super cover employees from a wide range of industries. But others attract employees from specific industries. Hostplus is the industry superannuation fund for employees in hospitality, tourism , recreation and sport. Those industries have been ravaged with massive numbers stood down and no longer making contributions. Most are set to claim $20,000.

The retail employees superannuation fund has also been hit by stand-downs but not as badly as Hostplus, thanks to the huge wave of buying that has hit the supermarkets. Cbus has been somewhat protected because, so far, considerable building activity has been continued. Both could be in a similar boat to Hostplus if there are further restrictions to their industries.

The specific-industry funds movement never envisaged the possibility that a virus induced shutdown could ravage their industry and that blow could occur at a time when a number of the funds (not all) faced a currency liquidity drain.

Few, if any, of the trustees remembered the famous Pasminco case two decades ago when the banks took the ill-fated miner to the cleaners for marketing high risk currency “protection” and then giving them a good kick when they did not wake up to the hazards.

When the industry funds became large they made substantial investments overseas including shares and illiquid infrastructure. Overseas investments are often 40 per cent of funds under management and sometimes higher. These long term investments have been very rewarding but carried a capital and currency risk. Most of the funds decided to hedge part of the currency risk with half the investments usually hedged. Given we are dealing with tens of billions of dollars these were massive currency hedges; manna from heaven for the banks.

But these were long term investments and required long term currency hedges. Unfortunately, a number of the funds entered into three months hedges which mean that every three months if the Australian dollar rose the funds received a cheque. But if the dollar fell the funds sent the banks a cheque.

Around December 15, 2019, a large number of three months hedges were taken out at around US69c. By March 15 the dollar had fallen to around US60c: a sickening 13 per cent drop. Very large superannuation cheques were written out which reduced liquidity. But one or two of the funds found that because the value of the overseas shares and assets had fallen sharply they then had too much “protection”. So, they unloaded “protection” which was effectively selling Australian dollars. The banks saw then coming and the Australian dollar slumped to around US55c. It’s now back to around US60c.

The appeal for government or Reserve Bank help came because, in totality, the funds can see reductions in contributions, switches to cash, and a major exodus of funds via the $20,000 payments at a time when liquidity was reduced by the currency hedges.

Very wisely AustralianSuper lowered the value of its non-listed assets and others followed so that those taking $20,000 out or switching to cash are not given inflated payments.

Every superannuation fund will be affected by the lower contributions and estimated $27bn exodus of funds. Some will have both liquidity and asset balancing problems. We are looking at $6bn to $10bn in share market selling. The request for help came in the grim times, before the Wall Street jump which has helped the Australian market. This gives the funds the opportunity to lower their local and overseas share market exposure. But the long-term fallout from the above events is that we may see industry fund mergers so that there are fewer funds dependent on one industry.

Footnote: Wall Street was boosted by the stimulus package but also the message from a physician in New York State claiming he has used the anti-malaria drug hydroxychloroquine and zinc to treat 350 patients for COVID-19 with 100 per cent success. Dr Vladimir Zelenko said he saw the symptom of shortness of breath resolved within four to six hours. I cannot verify the claim but, as I pointed out yesterday, President Trump’s plan to reduce the US clamps after Easter depends on this cure being validated.