Running Headlong into Trouble

When a senior manager within the Australian Prudential RegulationAuthority (APRA) earlier this year used an address to a superannuationfunds conference to canvass the need for funds to ensure theymaintained adequate liquidity to meet fund obligations as they felldue, there was much huffing and puffing about a representative of aregulator implying that some Australian superannuation funds might notbe able to handle a ‘run’ by members.

Those comments were made at the Conference of Major SuperannuationFunds in March by APRA’s general manager, specialisedinstitutions, Ramani Venkatramani, and it is worth noting that theAssociation of Superannuation Funds of Australia (ASFA) has in recentweeks filed a submission with APRA that, in essence, calls fortemporary relief for superannuation funds from the requirement to payout member benefits within 30 days.

The issue, therefore, is obviously one of liquidity — thevery matter Venkatramani saw fit to raise in early March.

Under the relief being sought by ASFA, individual funds would be ableto exercise discretion regarding the timing of payments to members andthen notify APRA.

While the ASFA submission appears for the most part to be entirelysensible and timely, it would also appear to raise some seriousquestions about whether some funds have adequately addressed theirliquidity issues — a situation the regulator ought tourgently address.

Financial planners wishing to provide their clients with sound advicewill be wondering which funds have liquidity issues and which do not.

These same planners might also be wondering whether, notwithstandingthe risk of unreasonably spooking members, the regulator ought to bepublishing the names of those funds that have sought and obtainedtemporary relief.

Then, too, there is the question of whether some of the efforts ofratings houses remain valid in circumstances where they are sitting injudgment of the performance of particular superannuation funds withouttaking into account whether those funds have a capacity to meet theirobligations to members within a conventional 30-day timeframe.

What we cannot know without being allowed to see the balance sheets ofthe various superannuation funds is whether those with liquidityproblems have higher than average exposures to illiquid assets such asdirect property. If that were the case, then some of the researchsuggesting industry funds have outperformed retail master trusts wouldneed to be revisited.

On the face of it, the workings of Australia’s superannuationindustry should dictate that not one well-run fund should beencountering liquidity problems. The steady, Government-mandated flowof Superannuation Guarantee monies should be adequate to keep fundsliquid. If this is not the case, then the regulator needs to do vastlymore than simply grant funds temporary relief.

All of this represents a substantial challenge for APRA because, on theone hand, it would not wish to undermine member confidence in fundswhile, on the other hand, it would seem equally inappropriate to denysuperannuation fund members and their advisers vital information aboutthe manner in which particular funds are being run.

Of course, the challenges facing APRA would be so much less politicallycharged if there were not an ongoing debate and advertising campaignsurrounding the relative performance of industry funds when compared toretail master trusts. The last thing the regulator would want is forapplications for relief to be used as ammunition on either side of theongoing ‘compare the pair’ debate.

When the dust finally settles on the global market meltdown and itsimpact on superannuation fund returns and fund liquidity, APRA might bewell-served in undertaking an analysis of the things that worked anddid not work in terms of superannuation performance and liquidity. Itis clear that some important lessons need to be learned.