THE LIQUIDITY risks of super funds will inevitably rise in future due to several factors, including more investment in alternatives, the aging population and faster movement of funds, according to the superannuation regulator.
The Australian Prudential Regulation Authority (APRA) warned the majority of members continued to take out their benefits as a lump sum on retirement, and as the “baby boomer bulge” moved fully into retirement age, the amount of funds being taken out of the system would increase.
Other factors already impacting on liquidity included volatility in investment markets spooking members, the ability now for account-based pensions to be withdrawn in full tax free if the member is over 60, increased ability to move funds and investment in unlisted alternative assets.
“In the post-[registrable superannuation entity] licensing world, to date APRA has yet to see many funds undertaking any significant research into their membership makeup, or extrapolate the aging of this membership over time, thereby building up potential scenarios and assessing the impact on their position,” said Ramani Venkatramani, general manager diversified institutions at APRA.
He said liquidity risk is one of the major risks he expected to see trustees factoring into their operational and strategic planning.
Many funds have significant exposure to alternative investments, and this is likely to expand further into other areas, such as infrastructure, in the near future according to the Deloitte/ICAA study released this month (see below).
But Venkatramani said these investments had inherent illiquid characteristics, including being difficult to value, “lumpy”, and sometimes long-term.
“The trustee needs to weigh up the trade-off between investing in illiquid long-term growth assets and the need to realise liquid assets in a relatively short timeframe,” he told the Conference of Major Superannuation Funds.
“This issue is particularly problematic where a fund offers an investment option that is heavily weighted to such illiquid assets. Think [collateralised debt obligation].”
Super funds might have to think about learning some lessons from the banking sector, including managing liquidity risk and counteracting market panic via industry-based pooling of funds, he said.
The Minister for Superannuation, Senator Nick Sherry, attempted to limit some of the market volatility last month by stressing investors should focus on the long-term performance of funds.
Venkatramani said APRA will expect trustees to have an adequate understanding of the liquidity requirements for their fund, develop analysis of risks, including “large-scale retrenchments, resignations or windups” as well as long-term changes in the demographics of membership.
In a review of the sector, APRA will also be looking at the risk management roles and the effectiveness of controls on liquidity risk.
“APRA’s review will … assess the systems and processes in place to ensure the liquidity controls and limits are adhered to and the reporting functions around these processes so that the trustee and management are confident that operational management have the capacity and tools to identify, monitor and report on liquidity risks,” Venkatramani said.