Members switching to cash options will present a bigger liquidity challenge than early release of savings for Australia’s A$3trn (€1.8trn) superannuation industry, according to industry leaders.

Chief investment officers from superannuation funds managing a total of A$600bn have told a virtual online roundtable hosted by Queensland Investment Corporation (QIC) that option-switching is a “much bigger deal” for the sector.

Ian Patrick, SunSuper CIO, said his fund had learned from the 2008-09 global finacial crisis that member behaviour could drive people to make an investment switch from balanced options to cash.

Liquidity stress testing, he said, had to anticipate meaningful moves away from today’s investments, whether by member behaviour in switching options or in choice of investment funds.

“If you looked around the industry, you’d find most funds have had a playbook to deal with liquidity obligations at least of the magnitude we’re talking about, on a moderate, even to severe, early release scenario.”

Patrick said COVID-19 had put a spotlight on liquidity, but the reality was that liquidity was not a new challenge for the industry.

Telstra Super CIO Graeme Miller agreed that liquidity stress was far more likely to come from option-switching behaviour than from early release.

“While that’s probably not true of every super fund in Australia, I’d say it’s likely to be the case for the great majority of funds in Australia,” he said.

“(It) is a much bigger deal from a liquidity perspective than any COVID-19 or early release scheme.”

Mark Delaney, AustralianSuper’s CIO, said it was still early days for members’ option switching.

“We’re not sure how this is going to pan out,” he said. “Most funds I’ve spoken to on this panel have adopted a very conservative approach to managing to make sure they’re not caught out.”

AustralianSuper, Australia’s largest super fund, has so far paid A$319m to 40,000 members who requested early release of part of their superannuation savings.

The fund has received requests from 85,000 members representing total super savings of A$650m.

“I don’t think the super system has too many illiquid assets”

Mark Delaney, AustralianSuper’s CIO

The Australian government is allowing members to take up to $20,000 as early release from their savings in two tranches to meet COVID-19 financial stresses.

The participating CIOs were unanimous in believing the industry would not have a liquidity problem of the type suggested by some critics because of the sector’s high exposure to illiquid assets.

Delaney described such claims as “a furphy” –  Australian slang for an erroneous or improbable story that is claimed to be factual.

“I don’t think the super system has too many illiquid assets. Most funds would have two thirds of their portfolio in liquid assets.”

The CIOs said allocations to illiquid assets gave members exposure to the broader economy, and that the risks often justified the returns.

Telstra Super’s Miller said: “Some of the very best assets, some of the very best companies and some of the very best investment opportunities will present themselves in liquid form.”

Another panelist, Troy Reick, CIO of Queensland-based LGIA Super, said it was “very hard” to make a case to buy a bond at 80 basis points per annum for the next 10 years.

“(How do you) tell members that that’s going to meaningfully contribute to their retirement outcomes?” he said.