MEDIA RELEASE: Majority of Australia’s super funds are likely to tip into negative cashflows
Monday 20 July 2020
MEDIA RELEASE
Majority of Australia’s super funds are likely to tip into negative cashflows
- The COVID-19 crisis is likely to accelerate the trend towards a more consolidated system, with fewer funds that deliver better outcomes for members
- The ‘early access’ scheme has seen more than 3 million applications for withdrawing more than $23 billion in superannuation assets
- The unprecedented increase in withdrawals could cause as many as 60% of super funds to be in negative cashflows at the end of FY20
Many Australia’s superannuation funds have suffered a significant blow to cashflows, with one in five Australian workers withdrawing more than $23bn in superannuation assets through the Federal Government’s early release scheme.
New analysis by consultants Right Lane has found that as many as 60 per cent of Australia’s superannuation funds, or 54 of 90 funds in total, could be in negative cash flows at the end of FY20.
The Right Lane report says COVID-19 has sent not one but three shockwaves through Australia’s superannuation system – investment market shocks which have caused increased volatility in returns; workplace disruption which has caused millions of workers to lose their jobs and stop contributing super; and the significant policy change which has seen 3 million applications to withdraw up to $10,000 from their fund as part of the Government’s ‘early access scheme’.
The report says the unprecedented decision to allow members to take early withdrawals from their funds during COVID-19 will see some funds experience a decline in assets of as much as 6 per cent.
Across the board, Right Lane believes, excluding investment performance, most funds will deliver modest or no growth in assets, and all funds in Australia will experience a decline in revenue in FY20.
“Australia’s superannuation system is confronting its biggest challenge ever as it attempts to manage the impact of ongoing rising costs while cashflows and revenues decline rapidly. These competing forces are not sustainable for short to medium term and the result will be additional pressure on funds to merge or cut costs,’’ said Abhishek Chhikara, Associate Principal at Right Lane Consulting.
“Our research has found that increased withdrawals from the ‘early release’ scheme alone could put 14 additional funds at risk of falling into a negative cashflow position in FY20. That comes on top of the 40 funds who were already cash flow negative going into the COVID-19 crisis,’’ he said.
“The pressure is mounting on super funds. They are finding it harder to grow while keeping costs low and as we have said before, slow growing, higher costs funds have been most likely to exit the system. The next three years will be critical period for the system as it tries to recover from the impact of COVID-19,’’ Mr Chhikara said.
The latest data highlighted by Right Lane also shows that several smaller funds, many of which rely on asset-based fees for a significant portion of their revenues, are likely to be hardest hit by the crisis.
“Decreasing funds under management as cash outflows take hold will have a significant impact on revenues, with the disproportionate impact being felt by the smaller funds. That is where the pressure will be hardest felt,’’ said Mr Chhikara.
Right Lane predicts a significant consolidation of funds in the coming years and that the optimal number of super funds in Australia is around 15, compared to the 90 that currently operate, based on data showing the long-term trends in cost efficiency, fund growth and investment returns.
About Right Lane
Right Lane was established in 1997 to help private, not for profit and public sector clients to accelerate their growth plans. The firm has a particular specialisation in the superannuation industry, advising several funds and their service providers. In 2015, Right Lane became Australia’s first B Corp certified strategy consulting firm. This follows Right Lane’s decision in 2011 to adopt ‘for benefit’ principles across the firm, including reasonable returns, inclusive ownership, stakeholder governance, transparency, and social and environmental responsibility.
For more information or a copy of a selection of pages from the subscriber-only 2020 Industry Super Forces at Work report please contact Abhishek Chhikara at abhishek.chhikara@rightlane.com.au or Stephen Dabkowski at steve@bluedot.net.au.
Virus cash crunch hits 60 per cent of super funds
The early release scheme could mean that 54 of Australia’s 90 super funds suffer from negative cashflow. That will accelerate the need for fund mergers.
If you would like further information on the topics discussed above, please contact Abhishek Chhikara at abhishek.chhikara@rightlane.com.au or contact Right Lane Consulting through the form below.