The Reserve Bank of Australia (RBA) has highlighted the growing importance of the country’s super sector to the stability of the financial system, due to both its size and its links to banks.
As of June 2024, the sector managed nearly $4 trillion in assets, equivalent to approximately 150% of GDP and 25% of the financial system’s total assets.
The central bank noted that the closed nature of the pensions sector, with its long-term investment horizon and limited leverage, helps mitigate systemic risks.
But with the sector now accounting for a quarter of Australia’s financial assets, the central bank warned its significant growth, increasing connectivity with banks and growing footprint in financial markets created new risks, including the ability to amplify shocks .
“The value of assets managed by pension funds doubled in the decade to 2024 and is expected to continue to grow faster than the financial system as a whole,” the RBA said.
“A recent illustration occurred at the start of the pandemic in Australia when pension funds increased their sales of bank debt securities to issuing banks, thereby increasing pressures on bank funding – which in turn increased funding costs across the financial system,” the RBA said.
Australia’s largest super fund, AustralianSuper, has already announced an ambitious target of $1 trillion in assets over the next decade.
“[Super funds’] The impact on the economy is increasing, which is obviously going to present more and more risks,” Dutka said, without wanting to elaborate on the seriousness of this risk.
He noted, however, that larger funds divesting shares could have a significant impact on price, while multiple funds divesting the same stock simultaneously could cause “a lot of problems.”
This point was also raised by the RBA, which said: “Unexpected liquidity calls – including capital calls on private asset exposures, abrupt policy changes or margin calls on foreign exchange hedges – could lead to synchronized asset sales in some domestic markets as funds attempt to raise cash. cash out quickly.
However, Dutka also pointed out that the large size of most funds means they tend to be less active in managing their stock investments.
“It’s not like steering a speedboat, it’s more like a super tanker,” Dutka said.
“They’re not trying to do a lot of active, high-turnover trades, or take those kinds of positions, because it’s just not that easy to do.
“So it’s a risk, but there are also constraints that can potentially mitigate it.”
According to the RBA, mitigating this impact begins with continued efforts by funds to strengthen their liquidity risk management practices.
As super funds invest more in overseas assets, managing liquidity demands linked to currency fluctuations will also become crucial, the central bank said. Additionally, as more members retire and start withdrawing funds, the sector could face cash flow problems.
“Managing liquidity risk will require constant vigilance, particularly with regard to margin calls on foreign exchange hedges,” the press release specifies.
However, the RBA noted that any changes would need to happen gradually, adding that the Australian Prudential Regulatory Authority has already strengthened standards to improve fund liquidity management.
“APRA now requires a greater degree of sophistication in liquidity risk management practices across the sector,” he concludes.
