Australian super funds brace themselves for a potential $50 billion withdrawal

The shock is wearing off and now Australia’s superannuation funds are getting ready for the big withdrawal.

While the Federal Government has estimated that Australians facing hardship will be repaid about $27 billion tax free from their super savings in two $10,000 lump sums, other estimates have ranged to $50 billion and potentially higher as people who have lost their jobs due to the COVID-19 lockdown struggle to remain afloat.

Withdrawals a potential wealth hazard

The decision to allow early super withdrawals has been controversial, with super funds complaining that they may have to sell assets at a low point to meet a potential flood of redemptions.

Superannuation figures have also warned that withdrawing money early from super could result in a loss of retirement funds up to five times larger than the amount withdrawn and urged people to consider better alternatives.

ATO helps funds to cash up

Some of the pressure for the funds to raise cash has been relieved by a decision of the Australian Tax Office to give superannuation funds a six-month reprieve for the transfer of unclaimed super balances.

That move by the ATO is estimated to put up to $4 billion of extra cash in the kitty for super funds and many are already conserving further cash so that they can fund the repayments.

industry fund Hostplus is a good example, with chief executive David Elias admitting that his fund had recently bolstered its cash reserves to $6 billion from $2.1 billion.

Funds writing down assets, raising cash

Hostplus has also written down the value of its property and infrastructure investments by between 7.5 to 10% and its private equity and venture capital investments by an average of 15%.

These asset classes make up more than 30% of the fund’s flagship balanced investment option.

Getting asset values right is particularly important at the moment because of the potential for unfairness to those withdrawing and those buying in or remaining if assets are not correctly priced.

However, it can be a very difficult task to accurately price very long-term assets such as infrastructure at a particular point in time.

One example would be an airport which could be suffering a hefty value crunch due to travel restrictions but still may offer excellent long-term returns.

Similar actions are taking place across the full spectrum of super funds, with those covering younger members with lower account balances and working in industries that have been hard hit by the COVID-19 pandemic preparing for a larger number of withdrawals.

Cashing super should be a last resort

In general, financial planners have been recommending against the super withdrawals except in cases of extreme need because of the effect of reducing retirement savings and selling out just after a major share market crash.

Some cheeky accountants are even spruiking the idea of making an extra $10,000 super contribution and then withdrawing it later to save tax – not really the idea of the crisis withdrawal.

The decisions for retirees or those very close to retirement are even more complex.

Again, in general financial planners have also been discouraging knee jerk switches to cash because they can crystallise losses and reduce the ability to bounce back as share markets one day rise again.

Retired have some options

Even those already retired are being urged to stay the course and stick with asset allocations that suit their risk profiles, although a lot of this advice has fallen on deaf ears judging by the many people who have swung to cash during the crisis.

Another popular strategy has been to minimise withdrawals, with a recent crisis measure introduced by the government allowing retirees to halve the minimum mandatory draw down from superannuation in retirement phase.

That may suit some retirees who have been forced to save money due to domestic and foreign travel restrictions and may want to temporarily reduce their drawdowns to avoid depleting their accounts too early – particularly after balances have been slashed by the share market crash.

Even without reducing drawdowns below the mandated levels, many retirees who draw a super pension will have their income automatically dropped a little to reflect lower balances at the end of the financial year.