Australian superannuation funds are steeling themselves against a looming cash crunch, one which in Britain has resulted in a mass sell-off of assets.
The largest Australian funds have been stockpiling cash to ensure the UK crisis is not repeated here.
The UK’s September ‘mini’ budget, brought down by now departed Prime Minister Liz Truss, sent British pension funds into meltdown, with many scrambling to sell off assets to meet guaranteed pension payout amounts.
While Australia is facing many of the challenges that led to the Truss mini budget and the pension fund crisis, there are mitigating factors here that mean a similar crisis is extremely unlikely.
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One of the chief differences is that while Australia’s funds have ‘defined contributions’, most do not have the ‘defined benefits’ clause that has led to the forced sell-off of assets in the UK.
Nevertheless, the Aussie funds are watching the events closely, taking pre-emptive protective action and testing their own abilities to withstand the current global financial stresses.
Andrew Lill, chief investment officer of REST, one of Australia’s top dozen super funds by asset, says selling off assets should be a measure of last resort: “For our funds that have so many members, you just want to try and follow every option to avoid having to sell assets [just] because you have to sell assets,” he said.
Mr Lill said that such a last-resort option is unlikely to be needed here. Referring back to the UK crisis, he said: “It’s harder to see the catalyst for that particular event happening in Australia.”
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Despite those reassuring words, it has been a rough 12 months for Australia’s super funds.
Balanced super funds are down about 5.7 per cent over one year while growth super funds are 7 per cent lower over the same period.
Rising interest rates and inflation have had an unavoidable impact, says Sonya Sawtell-Rickson, CIO of HESTA, which has roughly the same asset base as REST.
“There is nowhere really to perfectly hide from rising rates and inflation if it is structural,” she said.
But Australia has been able to hide, generally speaking, from a liquidity crisis like that in Britain because we have defined contributions.
Chief executive of State Super John Livanas says he would be staggered if liquidity was an issue for Australia’s large funds given those defined contributions.
Mr Livanas has been paying perhaps even closer attention to the happenings of the UK than other fund managers because State Super is one of the Australian funds that does have defined benefits.
However, Mr Livanas was quick to point out that State Super’s strategies do not incorporate the risks that have ‘come home to roost’ in Britain.
UK pension funds hedge against interest rate changes by buying government bonds with a 30-year duration, a so-called ‘immunity’ strategy.
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But while the strategy mitigates interest rate changes it creates another risk, says Mr Livanas. “UK pensions might have mitigated the interest rate risk but created a liquidity risk in turn.”
He says that Australia’s large defined benefit funds don’t use immunisation strategies that way because they believe a properly managed balanced fund will perform better than just using bonds.
So while Australia’s super funds are facing further challenges, liquidity will almost certainly not be one of them.
Are you aware of the pension crisis in the UK? Are you concerned about how Australian super funds are performing? Why not share your experience and thoughts in the comments section below?
Spare a thought for UK pensioners living here because their pension is frozen at the rate they were awarded when they began collecting their UK pension. That means they have had no CPI increases in decades for some. The reality of this for example is that someone collecting their pension today would get 187 pounds a week today, in 10 years time they would still get the same amount. But this rule does not apply to all UK pensioners living overseas; Australia and Canada are the recipients of this largess even though there is reciprocal social security agreements in place.