Withdrawals of $31 Billion Threaten Australian Pension Returns

(Bloomberg) --

The world’s fourth-biggest pension pool is bracing for multi-billion dollar outflows and diminished returns after Australia’s government allowed people hit by the coronavirus outbreak to dip into their retirement savings early.

The industry expects as much as A$50 billion ($31 billion) to be withdrawn over the next five months, causing liquidity problems for some funds. The policy, which comes into effect April 20, also risks locking in investment losses as assets are sold to fund the payments amid the worst market volatility since the global financial crisis.

While leading funds such as AustralianSuper say they have enough liquid assets to meet liabilities, they’ve expressed concerns about the plan and the likelihood that investors will miss the opportunity to ride the eventual market rebound.

“Funds are less sure of themselves and that is providing a little bit of sand in the gears to the normal counter-cyclical investing role,” said Stephen Anthony, chief economist at Industry Super Australia which represents union-backed pension funds. “Funds are now in this position where they may have to think twice around their cash buffers.”

Pension systems the world over face liquidity concerns as the coronavirus sweeps through economies. In the U.K., for example, some companies are seeking to freeze payments to employees’ retirement plans as they rush to preserve cash.

Worse Off

Under Australia’s retirement savings system known as superannuation, companies pay 9.5% of a worker’s gross salary into a fund that typically can’t be accessed until age 65. But with the jobless rate expected by some economists to spiral into double figures within months, the flow of such contributions will decline.

As part of the government’s response to the outbreak, people in financial stress will be allowed to access up to A$20,000 in the next five months. Taking out the full amount risks workers being between A$60,000 and A$120,000 worse off at retirement, depending on their age now, according to Industry Super Australia.

Australia’s Treasury says that less than 1%, or A$27 billion, of the almost A$3 trillion pensions pool will be withdrawn. Rice Warner puts the figure at between A$40 billion and A$50 billion. Still, with cash making up about 10% of assets, only the smallest funds, or those heavily invested in illiquid assets such as airports or toll roads, should feel the squeeze.

A broader concern is that funds may miss buying opportunities that typically come with a market downturn, said David Haynes, a senior policy manager at the Australian Institute of Superannuation Trustees, an industry advocacy group. They will have less capacity to take advantage of depressed asset prices “if they have to hold larger reserves of cash” to meet demands for early release.

©2020 Bloomberg L.P.