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APRA canvasses COVID-19 super fund exits

BY MIKE TAYLOR

The extended period of the COVID-19 pandemic may hasten the exit of some superannuation funds, according to the Australian Prudential Regulation Authority (APRA).

In an analysis within its latest corporate plan, APRA pointed to the challenges facing superannuation funds as a result of the COVID-19 pandemic and the associated hardship early release superannuation arrangements and noted that the longer the situation continued the greater challenges would be.

It then said that the “pandemic and associated impacts will also continue to accelerate viability and sustainability issues facing some superannuation funds, particularly those who were already showing indications of challenges in continuing to be able to sustainably deliver quality outcomes for members”.

Elsewhere in its analysis, APRA also noted that beyond the pressures being exerted by the early release scheme, “rising unemployment will continue to impact the cashflow of superannuation funds as contributions are likely to slow and outflows are expected to remain elevated”.

“Service continuity within both funds and service providers such as administrators has generally been maintained despite increased member activity, including high call volumes and the need to manage early release applications expeditiously. However, sustaining service levels through an extended period of substantially remote working will require careful management,” the analysis said.

Assets under custody drop 7.7%

BY JASSMYN GOH

Assets under custody in Australia has declined 7.7% to $3.75 trillion over the six months to 30 June, 2020, according to Australian Custodial Services Association (ACSA) data.

ACSA said the fall in assets was largely a result of market valuation impacts and the spike in transactions reflected the level of activity by underlying institutions adjusting their portfolios in response to the COVID-19 pandemic.

State Street had the largest decline in assets, down 20.8% to $405.2 billion, followed by a 10.2% decline for HSBC Bank to $179.8 billion, and a 9.3% decline for BNP Paribas to $463.3 billion.

Only Netwealth ($31.5 billion) and BNY Mellon ($27.1 billion) increased their assets at 10.5% and 10.2% respectively.

J.P. Morgan had the largest amount of assets at $820.2 billion.

ACSA chief executive, Robert J Brown, said: “According to a recent ACSA member survey, 82% of asset servicing professionals are working from home. At the same time we have witnessed record volumes of transactions in the market. Despite the obvious challenges, there has been minimal disruption to service provision.

“Although our industry is highly automated, there are exceptions. Asset servicing providers have needed to adapt to the social distancing and movement restrictions under public health orders, and this has created challenges for handling physical documents. Mail room and vault access, support for transactions that require wet ink signatures and physical cheques all triggered changes to process for custodians, registries and other key players in the service chain.”

Repeat early release members took out average $16k

The average superannuation member fund that used the early access to super scheme twice has taken out $15,854, according Australian Prudential Regulation Authority (APRA) data.

APRA data found the average initial application amount was $7,402 and the average repeat application was $8,452.

APRA data has showed that applications for the hardship scheme has tapered off with 59,000 applications over the week to 23 August, a drop from 70,000 the previous week.

Over the week, 35,000 were initial applications and 24,000 were repeat applications. This has brought the total number of initial applications to 3.1 million and repeat applications to 1.2 million since the start of the scheme.

The total amount paid is now at a total of $32.2 billion with 10 funds accounting for $21.2 billion.

The top 10 funds that had paid out the most were AustralianSuper ($4.48 billion), Sunsuper (3.26 billion), REST (2.96 billion), Hostplus ($2.8 billion), Cbus ($2.06 billion), HESTA ($1.6 billion), Retirement Wrap ($1.5 billion), MLC Super Fund ($1.91 billion), and Retirement Portfolio Services ($983.6 million).

Link declines to provide guidance in face of COVID-19

BY MIKE TAYLOR

Major publicly-listed superannuation administration company, Link Group has reflected the challenging circumstances facing the superannuation financial services sectors reporting a 16% decline in net profit after tax of $144 million.

The company reported a statutory net loss after tax of $114 million which it said was largely driven by a $108 million impairment of its corporate markets business.

The board declared a final dividend of 3.5 cents per share 50% franked.

Within its retirement and superannuation solutions division, the company reported a 6% decline in revenue to $519 million when compared to the prior corresponding period but said that when adjusted for prior year client losses and the impact of regulatory reforms strong underlying member growth helped the division deliver underlying revenue growth of 5%.

However, it said that operating EBITDA of $78 million and operating EBIT of $65 million were down 36% and 40% respectively on the prior corresponding period largely reflecting the flow on impact of lower revenue and the high level of operating leverage in the division.

The group’s soon-to-retire managing director, John McMurtrie, said Link Group had demonstrated overall resilience in a period of change and multi-faceted challenges.

However the company stopped short of giving any guidance, with McMurtrie saying that the future trajectory of the COVID-19 pandemic and its potential economic impacts remained unclear and that “we believe additional financial guidance is not appropriate at this time”.

Switching to cash bigger negative impact than early release of super scheme

BY JASSMYN GOH

Superannuation fund members who have switched to cash as a response to the COVID-19 pandemic will experience the greatest adverse impact, and members may need to keep working anywhere between two and eight years longer before retiring, according to Willis Towers Watson.

Willis Towers Watson’s latest research on the impact of the virus on retirement adequacy found that while the proportion of members that switched to cash was still reasonably small across the industry, it could be very damaging and was particularly acute for older members.

This, the firm’s head of retirement solutions Nick Callil said, reflected the impact of investment returns in what it called the “retirement risk zone” in the years immediately preceding and after retirement date.

The impact of the early release of super was higher for younger members with the exception of those with a low earnings base and account balance, where withdrawals were significantly less than the full $20,000.

The research noted that younger members were most impacted by periods of unemployment, with lost income in the early years equating to the largest differences at retirement through the powerful force of compound interest.

“Some members, particularly higher earners, may choose to retire with a slightly lower retirement income if they are able to maintain their desired lifestyle with the funds available to them. For others, the most obvious action may be to contribute more by way of voluntary member contributions,” Callil said.

“However, at a time where unemployment is projected to reach its highest since the great depression, many members will not have the ability or inclination to use available income to support additional contributions even where the need is recognised.

“Those who are unable or unwilling to make additional contributions may be forced to work past their preferred retirement age – if such an option is available to them. Clearly, for those approaching retirement, this approach may not be feasible with an additional working life of up to eight years required to achieve pre-COVID-19 adequacy levels.”

He noted that funds needed to understand their membership, what their projected retirement adequacy looked like, and how it had changed through this time.

Super gender gap exacerbated with early release

The gender gap in superannuation doubles for women under 34 if they have used the early release of superannuation scheme to combat financial hardship brought by the COVID-19 pandemic, according to data.

Data released by the Australian Institute of Superannuation Trustees (AIST) and Women in Super (WIS) found that women who accessed their super through the scheme were even further “behind of the eight ball when it comes to retirement savings”.

AIST head of advocacy, Melissa Birks, said: “In normal times, the gender super gap starts to become more evident when many women take a career break to care for their first child in their 30s. Some of these women will now be saving for their retirement pretty much from scratch when they return to work”.

The joint analysis found that female applicants aged 25 to 34 had on average a starting balance before the pandemic of $19,906 – 21% less than the average male balance of $25,200. After withdrawing their super, this gap widened to 46%.

Women aged 25 to 34 withdrew on average 35% of their balance, compared to 29% for men in the same age bracket. In all age brackets, women withdrew a greater proportion of their account balance when compared to men.

AIST and WIS noted that it was estimated that 15% of all applicants had had their super fully wiped out.

The two groups called on the Government to commit to a return to pre-COVID-19 super preservation rules from 1 January, 2021, and recommended: • Maintaining the legislated timetable for the superannuation guarantee (SG) to increase to 12%; • Payment of SG on Government paid parental leave; and • Removal of the $450 monthly threshold before SG was payable.

MySuper assets down 3.3%

BY JASSMYN GOH

Superannuation benefit payments for the year to June 2020 increased 31.2% from the previous year due to the early release of super scheme, leading to a decline of 0.6% of total super assets and 3.3% for MySuper products, according to data.

Australian Prudential Regulation Authority (APRA) data found total super assets in June 2020 stood at $2.86 trillion, compared to $2.88 trillion in June 2019.

APRA-regulated assets dropped 0.2% to $1.92 trillion, of which MySuper products dropped 3.3% to $731.3 billion.

“Quarterly benefit payments were $37.4 billion, significantly higher than the March 2020 quarter ($21.1 billion) and the June 2019 quarter ($20.5 billion) due to payments made under the Early Release Scheme which came into effect on 20 April 2020,” APRA said.

“Amounts transferred to the Australian Tax Office as inactive low balance accounts are also counted in the June 2020 benefit payments figure. Benefit payments for the year to June 2020 were 31.2% higher than to June 2019.”

APRA said key statistics for entities with more than four members for the year ended 30 June 2020:

Total contributions

Total benefit payments Net contribution flows June 2019 $114.7 billion $76.5 billion $38.0 billion June 2020 $120.6 billion $100.4 billion $23.5 billion Change

+5.2%

+31.2%

-38.2%

SG increase needs to go ahead: ASFA

The increase in the superannuation guarantee (SG) should continue as legislated as the COVID-19 related reductions in employment had disproportionately impacted the young and those on lower incomes, according to the Association of Superannuation Funds of Australia (ASFA).

In its Budget submission, ASFA recommended the SG be gradually increased to 12% as the majority of applications of the early release of super scheme were under-35 and while they had a substantial period of years before retirement, they would miss out on the benefits of the compounding of investment returns over many years.

ASFA also recommended the Government amend the current legislative framework to include dependent contractors within the scope of the SG.

It said as the rise of the gig economy lead to shifts in the structure of the labour markets, a larger proportion of people had some form of independent work arrangements, such as independent contracting, where workers were generally not covered by the SG.

The super body also recommended that unpaid SG entitlements be included in the definition of unpaid employment entitlements for the purposes of Fair Entitlements Guarantee (FEG).

ASFA said while JobKeeper payments were helping keep businesses solvent, once the program ceased there would likely be a substantial increase in the number of insolvencies.

“…it is likely that there will be continuing cases where there are unpaid contributions when businesses become insolvent. Greater visibility to unpaid employer contributions will be of only limited assistance where the employers do not have any financial capacity to pay given COVID-19 impacts on their businesses,” the submission said.

“In ASFA’s view, there is merit in reviewing the treatment of unpaid SG entitlements in insolvency/bankruptcy, with the objective of considering how to achieve the maximum possible recovery on behalf of affected employees.

“ASFA estimates that on a regular ongoing basis it would cost around $150 million per year to include unpaid SG in the FEG, with around 55,000 employees a year benefitting. In 2021/22 as a result of COVID-19 related insolvencies the figures might be more like $600 million and 220,000 employees.”

The super body also reiterated that the $450 super threshold be removed and proposed measures to improve the productivity of super administration.

The measures proposed were: • Change the default communication medium from paper to electronic; • Make advice more accessible and affordable for members; • Centralise data reporting by funds rather than having reporting to multiple agencies and departments; • Address issues inhibiting superannuation fund mergers; • Make it easier for members to make a contribution and to claim a tax deduction; and • Ensure greater stability in policy settings.