Australia’s $3 Trillion Retirement Problem

Australia’s $3 Trillion Retirement Problem

See, I’m about to delve into a sensitive topic…

Oh yes, today I’m talking about Australia’s retirement pot.

Yet for once, I’m not the one lifting the curtain on this sector.

Rather almost one million Aussies are about to do that for me…

Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself.

Australia’s $3 trillion problem

In this post-coronavirus world, roughly one fifth of us don’t have a job.

On top of the government coming up with fancy sounding programs like JobSeeker and JobKeeper, another solution to stop the dominoes from toppling was to loosen the rules around accessing our superannuation early.

And today, some 900,000 Aussies will see the ATO begin to work through their applications claiming financial strife.

Although, one estimate from the ATO says as many as 1.3 million Aussies could start yanking some cash out.

What would that mean for the near $3 trillion super system?

Well, like all things on the surface, it shouldn’t mean much.

Official estimates say that if all those people do draw the maximum amount from their super, it at worst should be $65 billion dollars.

That’s roughly 2.1% of the stock market’s value before its fall. If the estimates are correct, in theory it shouldn’t hurt the industry too much.

The reality could be very different.

At the end of February this year, the entire $2.92 trillion in the superannuation industry had about 22% in Aussie shares and 25% in international shares. Then there was another 10% in cash, 12% in Australian fixed interest, and then 9% in international fixed interest.

The remaining 22% is spread across listed and unlisted property, infrastructure, hedge funds, unlisted equity, and ‘other’.

So we should reasonably assume that the majority of assets were fairly liquid across all funds.

Although the viability of one fund is coming into question.

Under the cover of bigger headlines — and late on Friday evening — one superannuation fund went and rewrote their own rules.

Hostplus announced on 7 April that the trustee retains ‘absolute discretion’ when it comes to allowing withdrawals from members.

Hostplus is the industry superannuation for the hospitality and broader service industry. So it wouldn’t be surprising to see it have a higher number of withdrawal requests than others.

Nonetheless, changing the rules late one night in favour of themselves is sneaky at best. At the worst you can’t help but wonder about the true availability of funds for withdrawal for their clients.

Worse still, only a week before this sneaky tactic the firm had said that meeting withdrawals shouldn’t be a problem.

The real problem isn’t what Hostplus went and did however, it’s the fact that we haven’t heard from the other much smaller funds.

Furthermore, the fact that a fund can go and rewrite the rules around how they allow you to withdraw your cash is disgraceful.

If they have the ability to change the process — even after the federal government insisted the rules needed to be loosened — it makes you wonder what they are really doing with your cash…

Peek behind the curtain

Hostplus is just one fund out of about 500 in Australia today. And I’m not going to tar all of them with one brush.

Nonetheless, the federal government decreed that the rules around early access should loosen in the short term…which is one step closer to nationalising the system.

This is what a writer for the Australian Financial Review wrote last year:

The Morrison government appears to be inching inexorably closer to a full nationalisation of the country’s $2.7 trillion superannuation system.

The nation’s capital may be experiencing a scorching heatwave, but senior Liberal ministers are hard at work, coming up with fresh plans that would wrest control of the country’s retirement savings away from the union-affiliated industry funds.

[…]

That means that Canberra either has to commit to a plan of action that would result in it effectively nationalising the country’s retirement savings industry, or it will have to decide to leave the industry’s structure pretty much as it is at present, and rely on stricter regulations and tougher penalties for trustees to lift performance.

For all its free market rhetoric, the Morrison government is clearly seduced by the first option.

The thing is, refusing or even dragging their heels on paying people out when the government has effectively demanded it, is giving us a peek behind the curtain of true liquidity and valuations of the retirement system we have.

If too many funds can’t stump up the coin when the government is asking them to, then the entire viability of our $3 trillion retirement system will come into question.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia