Virus Exposes ‘Systemic Risk’ in Australia Pensions Industry

(Bloomberg) -- The coronavirus crisis has exposed structural weaknesses in Australia’s retirement savings system and shown the urgent need for the pensions industry to consolidate, according to the government.

Senator Jane Hume, the assistant minister for superannuation and financial services, said the pandemic had highlighted the heavy concentration of some funds, whose membership is drawn from industries such as tourism, retail or hospitality. That left them vulnerable to the widespread layoffs impacting those sectors.

“It’s a systemic risk and it’s been hiding in plain sight for 30 years, but it’s only just coming to the fore,” Hume told Bloomberg’s Inside Track webinar. “Diversification of the asset base is not just the only important issue, it’s diversifying the membership base too.”

In a wide-ranging interview, the senator defended the government’s decision to allow people to access their retirement savings early to stave off financial hardship, despite concerns it would adversely impact their future returns.

Funds shouldn’t have to dramatically shift investment strategies to accommodate the payouts, as the total is so far less than 10% of the cash inflows received last year, she said.

There’s been “a mountain made out of a molehill here,” Hume said. Fund members switching into more conservative investments like cash from aggressive assets has had “a far greater effect on the superannuation funds than the early release scheme.”

Read more: Breaking ‘Sacred Rule’ Shatters Psyche of Australia Pensions

About 2 million Australians have applied for the first tranche of the early release program, with A$15 billion ($10.5 billion) paid out. The industry has complained the policy could cause liquidity issues for some funds and see investors miss the opportunity to ride the market rebound.

Funds such as Host-Plus Pty. and Retail Employees Superannuation Trust, which look after the retirement savings of hospitality workers such as waiters and bartenders, or people in the retail industry, have paid out more than A$1.2 billion each under the program, according to Australian Prudential Regulation Authority data.

The market turmoil has wiped out a year’s growth for Australia’s pensions industry, the world’s fourth-biggest pot of retirement savings, with assets under management falling 7.7% to A$2.73 trillion in the three months to March 31. That’s a marked turnaround for an industry that’s used to exponential growth, with 9.5% of a worker’s gross salary paid into a retirement fund each month.

Hume said those compulsory contributions would rise to 12% in 2025 as planned.

“It’s already legislated,” Hume said. “To undo legislation is a very difficult process and not one that I think would be highly likely.” She said she does expect pushback, though, from the business community “who understand there is a limited amount of money out there to pay employees.”

Australia’s pensions industry is consolidating amid increased scrutiny of under-performing funds and growing pressure to cut fees and boost returns. Hume expects that process to quicken as funds look to diversify their membership base.

The coronavirus crisis has “re-framed the decision for fund mergers, and in fact in a lot of cases it’s made the decision more urgent, and potentially opened up the field too,” she said. The prudential regulator wouldn’t be afraid to use its powers to push for more consolidation or for under-performing funds to exit the industry.

APRA has “a shiny new set of teeth and I think they might be ready to bite,” she said. “I don’t think we’re doing any grand disservice to the industry to see some of them merge. The funds aren’t necessarily serving the best interests of their members in this structure.”

©2020 Bloomberg L.P.

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