The Reserve Bank of Australia (RBA) has warned that significant liquidity pressures could arise in the superannuation sector if multiple risks materialise at once, potentially amplifying shocks in the financial system.
In its latest Financial Stability Review, the RBA said that a sharp downturn in the Australian dollar, coupled with large member withdrawals or fund transfers, could force superannuation funds to liquidate assets, intensifying financial market stress.
The central bank described this scenario as “extreme but plausible”, reflecting the growing complexity and risk exposure of the superannuation sector, which now manages assets worth $4.2 trillion.
While superannuation funds have historically supported financial stability by investing countercyclically and avoiding leverage, the RBA said that financial system stress could be amplified if the superannuation sector faced severe liquidity stress.
“APRA-regulated funds rely on member inflows and large buffers of liquid assets to manage potential cash outflows. If several risks materialised simultaneously, these funds might be forced to secure liquidity in ways that could amplify financial market stress,” the RBA said.
The RBA also said that the superannuation sector’s escalating exposure to foreign assets, which now make up approximately 48 per cent of APRA-regulated funds’ holdings, significantly heightens the sector’s vulnerability to foreign exchange risks and reliance on currency hedges.
“A large, sustained decline in the Australian dollar could drain liquidity through margin calls and renewal of foreign exchange hedges. Similarly, increased member transfers between funds could cause the sector to sell assets to increase cash holdings as a buffer against future transfers,” the central bank said.
It also said that “if system-wide early withdrawals and additional withdrawals from members in retirement were to occur abruptly and unexpectedly”, this could also create liquidity pressures for some funds.
In contrast, the Association of Superannuation Funds of Australia (ASFA) released new research just days before the RBA’s report, challenging the view that superannuation funds pose a risk to financial stability.
Instead, ASFA said that super funds strengthened Australia’s economy by boosting national savings, reducing reliance on foreign capital, and acting as a stabilising force during downturns.
The association said that during periods of heightened volatility, super funds tend to deploy new financial capital in a countercyclical manner.
“The steady stream of contributions – particularly into the compulsory super system – provides a fairly predictable source of new demand for domestic securities. Net of stable outflows for the payment of retirement incomes, these annual flows amount to around $50 billion,” ASFA said.
“In addition, super funds – as investors with relatively long-time horizons – can afford to absorb short-term asset-price fluctuations and are reluctant to realise losses.”
The research also highlighted super funds’ role in past financial crises, including the global financial crisis, when they provided critical liquidity as other capital sources dried up.
For its part, the RBA said managing liquidity risk is expected to become more challenging, particularly with the anticipated growth of the super sector outpacing the domestic economy.
With the shift in the demographic profile of members towards retirement, RBA said the net inflow of funds is expected to decline. Additionally, it said, as the sector expands relative to domestic markets, there is likely to be an increased reliance on foreign exchange hedges and investments in unlisted assets, which are harder to liquidate in times of stress.
The central bank pointed to a review carried out by the Australian Prudential Regulation Authority (APRA) in December, which found that several trustees required material improvements in both their valuation governance and liquidity risk frameworks.
The upcoming financial system risk stress test, scheduled for later this year, is expected to provide further insights into how the superannuation sector interacts with other financial sectors, especially during times of financial strain.
