The RBA governor has warned that Australia’s super funds, despite holding stable assets, could amplify market stress if forced to liquidate in response to sudden liquidity demands.
Reserve Bank governor Michele Bullock told senators last week that while super funds are not inherently as leveraged as banks, their significant role in financial markets raises concerns, particularly in times of market volatility.
This warning aligns with a recent International Monetary Fund (IMF) report, which highlighted that more than 20 per cent of Australian super funds’ assets are tied up in illiquid investments. The IMF said that this liquidity mismatch could undermine member outcomes during times of stress, particularly in market downturns.
Bullock’s comments were supported by the RBA’s own stability report, which found that the superannuation sector now accounts for a quarter of Australia’s financial assets.
Its rapid growth, rising ties to banks, and increasing footprint in financial markets have created new risks, including the potential to amplify financial shocks, the RBA’s stability report said in September.
Drawing parallels to the near-collapse of pension funds in the UK in 2022, Bullock said last week that large-scale asset sales to meet margin calls could exacerbate market ructions at home.
“If there are ructions in financial markets and we saw a little bit of this in the UK, it’s a different system there, but if super funds have to, for example, sell some assets to meet margin requirements than that can exasperate the ructions in the market and that might be a financial stability risk,” Bullock said at Senate budget estimates.
“The UK is a good example where what happened was there were problems in the financial market, in the bond markets, there were margin calls on [pension] funds because they had investments, and then they had to sell assets to meet those margin calls. That exacerbated the problems in the financial market.
“The fact that the assets and the liabilities of the super funds in Australia are reasonably stable, their long-lived, and their matched, is actually positive for stability. It’s just because it’s such as big part of the financial system now, it’s worth watching.”
In light of ongoing discussions around loosening superannuation withdrawal rules – such as allowing first home buyers to access up to $50,000 of their super – Bullock said that any increase in access could further strain super funds’ liquidity.
“What’s relevant here is that there are limits on how much you can withdraw from your super,” Bullock said. “If there was much more ability for people to take their money out of super then it does mean that super funds would have to have much more liquidity.”
While the RBA in September acknowledged that the closed, long-term nature of the super sector helps limit systemic risks, it also said that its rapid growth – now accounting for a quarter of Australia’s financial assets – along with its growing ties to banks and influence in financial markets, poses new risks that could amplify economic shocks.
“A recent illustration occurred during the onset of the pandemic in Australia when superannuation funds increased their sale of bank debt securities back to issuing banks, adding to bank funding pressures – which, in turn, increased funding costs across the financial system,” the RBA said in its Financial Stability Review.
