Retirement funds in Australia are having to assess changes to their asset allocations as goverment-mandated early withdrawals and a drop in contributions raise the possibility of funding shortfalls.

As many as two million scheme members in Australia could withdraw funds from their superannuation fund under the government’s hardship provisions, which were enacted in late April. In the first week alone there were 162,879 withdrawal applications totalling A$1.3 billion (A$834 million), according to the Australian Prudential Regulation Authority (Apra).

The country's superannuation funds are having to consider how best to retain enough liquidity to handle more drawdowns. While some are seeking to replenish any funding gaps after the markets stabilise, others remain guarded about investing in risk assets, including equities. 

Michael Wyrsch, chief investment officer at Vision Super in Melbourne, told AsianInvestor the A$10 billion ($6.45 billion) fund’s internal investment team pulled back from equities in mid-February “due to some caution around the pandemic – and then some more in early March. We started putting money back into equities in late March”.

More recently, the Vision team has been taking profits from equities, on the basis that there is no real visibility on earnings at this point “and there is still much we don’t know about the virus”.

“Countries have shown they can contain the spread of the virus, but returning to a pre Sars-Cov-2 world is another matter. Equities, however, look to be of good value compared to bonds in all but the direst of circumstances,” said Wyrsch.

He noted that the fund would wait until the economic environment improved before asking its members to start saving more once again. “We’ll start talking to them about replenishing their super once circumstances have changed and those members are starting to get back on their feet and able to think about the future, rather than just their immediate needs."

Commonwealth Super said on its website that it was the first Australian superannuation fund to implement a fully integrated bottom-up security level risk system in 2009, following the global financial crisis. “This allows us to have a very good handle on where the most significant risks are across the whole portfolio at any point in time, especially during market disruptions like the current situation,” a spokesperson for the fund told AsianInvestor.

Michael Wyrsch,
Vision Super

Asset owners of all types are naturally wary of being too bold currently, even though asset prices are attractive in some cases.

“Historically, pandemic scares have been opportunities to buy risk assets at prices below fundamentals, as we saw in the case of Sars in 2003. This may ultimately once again prove true in this particular case, but markets could go either way from here and predicting that is impossible,” said the spokesperson.

STAYING THE COURSE

Josef Pilger, Sydney-based global pension and retirement leader at EY, said investment teams at pension funds normally take into account that potential situations creating significant volatility.

“Their investment strategy should not alter dramatically unless they are on the extreme of being exposed to market losses and heavy withdrawals,” he said.

He added that funds at risk would be those that have been “heavily impacted on both the investment side and with members withdrawing, especially where they are involved in industries affected by the economic downturn”. 

“If they have a strategic asset allocation in place and certain investment beliefs, the fact that we’ve lost about 20% should not alter the direction,” he said.

Regardless of the strategies, pension funds' investment teams are reviewing their liquidity in the short- term to make sure they can withstand any potential market upheavals in the coming weeks and still meet their long-term targets.

“Clearly the market we’ve been in for the last month or two is really a one-in-a-hundred-years sort of financial market event. That will cause everyone to reassess what they are doing and make sure that they’ve taken that new information into account,” Raphael Arndt, chief investment officer at the Future Fund, Australia's sovereign wealth fund, told AsianInvestor.

Once again, the people hardest hit by the market downturn are those at or near retirement. Pilger considers the retirement industry has ignored this risk to investors because markets have been healthy for several years.

“Particularly with defined contribution systems, what we have done is outsource the investment risk to members. The uproar and surprise at this situation is understandable.”

So what measures can be put in place to protect scheme members from these black swan events? Wyrsch said, “Diversification is the only free lunch in investments and a way to smooth returns without lowering expected returns.”

But he added that the purpose of superannuation is to provide for members’ retirements. “If we try to guard against every black swan event, then over the long term we will probably not make as much for members’ retirement. However, at times, and in some circumstances, it does make sense."

Look out for another article soon, which will discuss how retirement systems might better shield older members from the impact of untimely market corrections.