In 2008, during the Global Financial Crisis, Warren Buffett famously passed along some investment wisdom: “You only find out who is swimming naked when the tide goes out”.

Buffett was speaking about the investment banks who were over-exposed to the sub-prime property markets and collapsed.  But the same adage can be applied to some super funds today.  

The COVID-19 crisis has shown that some super funds and their members are vulnerable.  It’s clear that some funds have taken risks to over-expose members to unlisted assets and growth assets generally.

The result?  A very real risk that certain funds will be unable to meet their financial commitments and make payments to members.  

Challenges for super funds

The business of industry super funds is usually simple. The government has mandated growth.  Almost one-tenth of every Australian employee’s income must be redirected into the super system.  

The industry funds collect these contributions via relationships with employers, count them and then invest the money. And the money usually stays there, invested.   Most Australians don’t engage with their super.  They don’t switch or make changes to their super until they approach retirement.

It’s a system that has been in place for around thirty years.  The trouble is, now it’s changing.  

People are losing their jobs.  Super contributions are now reducing as people lose their incomes with the economic downturn.

But that’s just the start.  As people lose their jobs, they will have trouble meeting their day-to-day commitments, causing financial stress.

To relieve the financial pressure, the government is allowing Australians to access up to $20,000 of their super over the next few months.

And Australians are planning to make the most of it.  As at mid-April, around 900,000 people had already registered for early access.

Unfortunately, some super funds may have difficulty making the payments.  The tide has gone out and revealed that some have indeed been swimming naked.

So, who are they?

Industry super funds with highly concentrated memberships are the most exposed.  Especially industry funds serving the hospitality, retail and tourism sectors. Funds like Hostplus, Club Plus, and REST.

Hostplus is clearly concerned.  At the start of April, they tried to build a legal basis for freezing payments if they want.  Changes to their product disclosure statement now allow the fund to “suspend or restrict applications, switches, redemption and withdrawal requests”.

And Hostplus should be worried.  They are over-exposed to unlisted assets; assets that can take a long time to sell because buyers are scarce.  According to their website, they have more than one-third of the fund’s assets in unlisted assets.  And with just 17% held in cash and bonds, they simply won’t have enough to meet the payments.  They will be forced to sell shares and lock in the losses of recent months. 

Don’t be the last to leave the party

There’s another emerging risk that needs to be managed. With super funds investing so much in unlisted, hard to sell assets, there’s an unfairness issue emerging.

Some super funds have been slow to reprice their unlisted assets to reflect the current economic conditions and business sentiment. It means that unlisted asset prices are inflated, meaning members are potentially treated differently.  Those who leave the fund receive higher benefits than those who remain.

You don’t want to be the last one at the party, left stranded holding over-priced unlisted assets, waiting for the price falls to come.

Remember, it’s your money, not theirs

At times like this you can’t afford to just wait things out.  But it’s hard to get the information you need to make good decisions.  An adviser employed by your super fund probably won’t help.  They’re more likely to recommend you just relax and stay where you are.  After all, that’s what they’re employed to do.

But it’s your money, not theirs.  That’s why we believe you should partner with a professional financial planner; an industry insider who can ask the tough questions of super funds on your behalf.  Someone who has no ties to your super fund.

At When Financial Solutions we’re self-employed advisers who are not tied to any super funds who might try to bias our advice.  

We’ll provide you with the information you need to make the right decisions.  So it won’t be a matter of ‘if’ you’ll participate in the market recovery, but ‘when’.

Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances.  If you would like advice specific to you, please give us a call.