Superannuation rides to the rescue three times

Superannuation Australia COVID-19 super fund invest bonds
Australia’s superannuation funds are about to rescue the country not once, not twice but an amazing three times.

With the COVID-19 pandemic causing widespread financial destruction of both company and household balance sheets, the early release scheme for superannuation has already put $4.4 billion in the hands of hard-pressed workers, with more to come once the current raft of approvals come through.

Then there is the second raft of early releases for the next financial year, which is likely to be even larger again.

However, the third and by far the most important rescue mission that superannuation is likely to perform is to play a very large part in recapitalising companies in the wake of the pandemic’s devastation, which will help these companies to keep employment levels higher than they otherwise could.

Capital raising plans above $10 billion and could go much higher

Already capital raising plans from Australian companies are above $10 billion and if NAB’s just released plan to raise $3.5 billion in extra capital is any guide, that figure is sure to escalate rapidly to $20 billion and perhaps much higher.

Similar levels of capital raising from the other three big banks alone could put the figure above $20 billion.

To see the role superannuation funds should play in this recapitalisation efforts we only need to go back to the GFC when Australian companies raised an amazing $119.9 billion in an effort to pay down debts and survive.

Superannuation funds played a pivotal role in those capital raising efforts, snapping up shares particularly in the larger companies in a much greater proportion than their size would suggest.

In simple terms, the super funds were one of the few investors that had the available cash to redeploy to the share market at a time when selling was a lot more popular than buying.

Some research from Allen Consulting Group founds that even though super funds held about 26% of the shares available on the market, they contributed around 48% of the capital raised during the GFC.

Super funds still ready to invest

This time around super funds may be a little less cashed up due to the dual early withdrawals of up to $10,000 per customer for each financial year, which some estimates say will see super funds pay out $50 billion and possibly more.

They will also have had slightly reduced investments by members who have lost jobs and who may remain out of work for some time but in general, the rivers of cash will still be flowing into superannuation funds once the COVID-19 restrictions start to lift – potentially during May.

However, the cash payouts and reduced deposits the super funds have had are dwarfed by the $3 trillion of assets within the total super pool in Australia, which is the fourth largest amount of pension funds in the world.

The main task of super funds is long term investment so when there are attractively priced capital raisings in strong companies with a profitable future, they are one of the first cabs off the rank to subscribe.

Already we have seen NAB (ASX: NAB) and other strong companies such as Cochlear (ASX: COH), Ramsay Health Care (ASX: RHC) and QBE (ASX: QBE) raising capital and that list will only get longer as time goes on.

Without the super funds standing ready to soak up shares in these quality companies, the downward price pressure on shares would be much greater.

Buying bonds is also helping

Another underappreciated role that super funds play is to buy Government debt which is piling up rapidly at the moment as the Federal and State Governments struggle to balance increased pandemic payments at the same time as tax receipts are tanking.

The Federal Government alone is spending more than $200 billion in stimulus payments to try to keep the economy ticking over despite the mass unemployment created by the lockdowns.

It seems a very long time ago now that the then Federal Treasurer Peter Costello was talking about shutting down the Australian bond market because the government was in surplus and wouldn’t need to raise any fresh cash.

Fast forward to now and the Australian Office of Financial Management recently sold a record $13 billion of November 2024 bonds with a coupon yield of 0.47% on a single day – well ahead of the previous record of $11 billion set in 2017.

RBA and Super funds buying bonds

The Reserve Bank is very active in the bond market, buying bonds to keep pushing down the two-to-three-year interest rates to 0.25% to keep rates as low as possible for borrowers.

Super funds are also big buyers of bonds despite the tiny yields because bonds can create significant capital gains in certain circumstances and are an important and very safe part of their overall investment portfolio.

Here again, the presence of super funds in the bond market is an important ingredient in creating a competitive market.

Super funds act like a shock absorber

While there have been some noisy calls for super funds to be wound back or even slowly abolished, the fact is that along with the floating Australian dollar, the presence of such a significant and growing pool of domestic capital is a major shock absorber and a big positive for Australia and for  the stability of our money and share markets.

There may be arguments that the way our superannuation system is set up may make it more costly and less efficient as a form of retirement income compared to something like the age pension but over the coming months the presence of our superannuation funds will be a large positive as Australia begins to recover from the serious economic dislocation caused by the COVID-19 pandemic.

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