Australian superannuation funds are large institutional investors that invest capital on behalf of Australian investors. Superannuation funds are required to invest the capital in members’ best financial interests, recognising the legislated objective of superannuation – “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”
Before retirement, Australians can only access their superannuation savings in limited circumstances. For most people, superannuation is a longer-term investment. Due to the rules underpinning the system and long-term nature of the superannuation capital pool, superannuation funds can invest over long time horizons.
Reflecting this long-term horizon, superannuation funds have invested a moderate proportion of their portfolio in ‘private market’ assets, such as private equity, private credit, property and infrastructure.
The one common factor between all ‘private market’ asset classes is that these comprise investments that are not publicly traded (“unlisted”) and are often considered ‘illiquid’.
Superannuation funds invest in unlisted asset classes that may have more attractive characteristics than listed assets, such as higher return, lower risk, lower volatility and can provide beneficial economic diversification in portfolios. However, they do so while targeting and maintaining a prudent level of total liquidity to ensure they can pay members when required.
APRA, under SPS 530, requires that superannuation trustees effectively manage liquidity risks, especially in volatile and uncertain economic conditions. This involves monitoring and assessing liquidity needs in response to member behaviour and external conditions.
The purpose of this paper is to consider the implications of changes to the preservation rules, particularly where it may require greater liquidity requirements for funds. We analyse whether this may result in a lower allocation to private markets, and the impact on superannuation fund members retirement balances.
We have divided this report into four sections:
- Section A provides a background to superannuation fund liquidity, including how much funds invest in private assets.
- Section B details the benefits of unlisted assets, with a detailed description in the appendix.
- Section C discusses how superannuation funds manage the liquidity of their portfolios, in particular the modelling they undertake to ensure they can pay members’ benefits as required.
- The last section, Section D explores (by way of example) the use of superannuation for first-time homebuyers, to access their superannuation savings for housing purposes.
Super Members Council of Australia commissioned Frontier Advisors to prepare this research paper.
You can read Super Members Council of Australia’s submission to ASIC here.
