Last month, a Morningstar study found that the country’s two largest super funds, AustralianSuper and Australian Retirement Trust (ART), now control a quarter of the market regulated by the Australian Prudential Regulatory Authority (APRA), collectively managing more of $620 billion in assets.
Additionally, the study found that after a wave of mergers, strong performance and high inflows, the mega fund club expanded to include Aware Super, UniSuper and Hostplus. At the same time, three additional funds – Cbus, Rest and HESTA – are about to join this elite group.
This rapid consolidation and growth of the superannuation sector has attracted the attention of international and local institutions, including the International Monetary Fund (IMF), which this month expressed concerns about liquidity risks within Australia’s super system .
Specifically, citing concerns about funds’ growing exposure to illiquid investments and the substantial size of some funds, the IMF warned that sudden demands for liquidity could lead to rapid, synchronized asset sales in domestic markets as funds scramble to raise cash.
Similarly, a month earlier, the Reserve Bank of Australia (RBA) had 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.
“We obviously need to ensure that funds review their liquidity management appropriately and regularly, taking into account factors such as demographics,” Little said.
Reflecting on the IMF’s concerns about funds’ exposure to investments such as private equity and credit, Little said that while there is “wide variation in a fund’s unlisted exposure to other”, it must be closely monitored.
“During the GFC period, a few funds had problems with their unlisted exposures and exceeded allocation limits, but I think funds have certainly tightened their valuation processes to more consistently value their assets,” said Little.
While he doesn’t currently see “too many issues” with funds’ ability to respond to member redemptions, the analyst noted that there remain some concerns that financial regulators should monitor in the future.
“It is difficult to say to what extent this is a current problem, but it is clear that it would worsen in a crisis. There’s no doubt that this is something that needs to be monitored, especially as megafunds continue to grow. There is always this ongoing race between industrial funds to continue to consolidate and build their economies of scale,” he noted.
According to IMF data, almost a quarter of the total assets of Australia’s big five super funds are tied up in illiquid investments.
While acknowledging that Australian regulations require funds to manage liquidity to accommodate client changes, he said the growing proportion of illiquid assets increases the risk of disruption, with similar trends being seen globally .
Earlier this year, Australia’s largest super fund canceled a $1.1 billion investment in software company Pluralsight, after the latter undertook a restructuring following a sharp decline amid rising prices. interest rates and increasing competition in the market.
Although AustralianSuper is well diversified and, as such, did not face any major obstacles in absorbing this loss, Mark Delaney, the fund’s CIO, said this week in the Australian Financial Review Super & Wealth Summit that the loss still “burns.” However, the fund intends to continue to invest in private equity, venture capital but also in the technology sector in general.
When the misstep involving AustralianSuper’s investment in Pluralsight became public, APRA Deputy chair Margaret Cole said the interaction between private credit and super funds is “opaque”.
This opacity, she said, is a central driver for APRA moving towards cross-sector stress testing, to better explore potential sources of contagion and gaps in the regulatory framework.
