You might be asking yourself, how safe is your superannuation savings given falling asset prices and early significant withdrawals stemming from the government’s early access to super scheme. If you are, then it’s safe to say you’re not alone.
The government’s early access to super scheme was introduced to help Australians experiencing hardship as a result of the Coronavirus and it’s been more popular than even the government expected.
Under the scheme, eligible Australians have been able to apply to withdraw up to $10,000 of their superannuation last financial year (before 1 July 2020) and a further $10,000 from 1 July to 31 December 2020.
Many Australians have taken up the offer to withdraw some of their superannuation and this has sparked concerns about whether certain smaller funds are safe and have enough liquidity to actually pay out their members if asked as part of the government’s scheme.
Making matters worse has been falling share market values.
In this article, we ask Kelly Power, General Manager – Product at Colonial First State, which looks after 870,000 super fund members, if we should be worried and what super fund liquidity actually means.
“Liquidity is a measure of how much of an investment portfolio can be readily converted (or sold) into cash by selling its assets,” she says.
“A superannuation fund needs to have access to liquid assets to ensure it can meet demands from members – whether that be someone withdrawing a retirement lump sum or switching their investment choice.
It has become more important now as the government’s early access scheme has allowed members to access some of their superannuation now rather than wait until retirement, subject to demonstrating financial impact due to coronavirus.
“Liquidity is important because it allows your fund to make payments to members and for members to adjust their investment strategy or switch funds even when the market is down.
“This is important to you because it ensures that your fund can provide you flexibility if you want to make changes to how your superannuation is managed.”
Liquidity and superannuation: Why it matters.
“Your superannuation account is effectively an investment portfolio that comprises both liquid assets and illiquid assets,” Ms Power says.
“As a general rule, assets listed on a stock exchange, such as shares and exchange traded funds (ETFs) are more liquid than assets that are bought and sold directly between investors.
“Unlisted assets are not bought and sold on an exchange. This means that pricing is usually less transparent, and it usually takes longer to arrange a buyer and a seller to agree on a price and terms in the transaction. Examples of unlisted assets include:
- Property: shopping centres, warehouses, and offices buildings
- Infrastructure: roads, railways, ports, and airports
- Utilities: electricity, gas, telecommunications, water plants and distribution centres
- Social assets: hospitals and aged care facilities.
- Private equity: start-ups and private companies.
“Some funds have a higher proportion of unlisted, illiquid assets.
“Others have a higher proportion of listed, liquid assets. The right mix of assets is designed to deliver the right balance between risk, return and portfolio liquidity.
“Holding a portion of unlisted, illiquid assets is a good diversification strategy and can improve returns of the fund, but funds still need to have a majority of their holdings in listed assets to manage the liquidity needs of their members.
“Many people think in terms of the accumulation (or saving) phase of superannuation. However, the drawdown phase is where managing liquidity becomes very important, as retirees often rely on regular payments from their super fund as their primary source of income.
Liquidity is a fundamental part of managing a superannuation fund. If you want to find out more about your super fund’s liquidity, here are a few things you can do:
- Call your fund or visit the website: While super funds don’t tend to provide specific information on liquidity, your fund’s product disclosure statement (PDS) will give an overview of the fund’s investment strategy and target asset allocation. This is a good starting point. Or you can call your fund and ask about their liquidity management planning.
- Seek advice: Navigating superannuation can feel daunting, so don’t be afraid to ask for assistance.
You could consider seeking advice from an expert who can help to make sense of it all.
