With the government facing a years-long budget deficit, super funds may be the stabilising force it desperately needs.
Superannuation has a proven history as a market stabiliser. During the 2007-08 global financial crisis, the super system restored balance to the Australian financial system and the broader economy. As we stare down a worldwide economic catastrophe, super may be a life raft once again.
In the wake of widespread job losses due to Covid-19 economic shutdowns, policymakers are looking for ways to stimulate economic recovery. Industry Super Australia chief economist Stephen Anthony says “cash-strapped” governments may find the answers in Australia’s $3 trillion pool of super savings.
All they must do is empower funds to play the role for which they are designed: to act as countercyclical investors, supporting the economy to grow. Super, Anthony says, is ultimately about a long-term investment in retirement income for the future. For the individual, it grows a nest egg through the power of compound interest.
The impact on the market can be even more significant. This system is designed for long-term, buy-and-hold investment over many decades, but it gives the Australian economy advantages in the present, too -especially during bouts of market volatility. Anthony says this is made possible by a huge pool of capital that can look beyond short-term losses if it means setting up benefits in the years ahead.
“We are always buying things,” Anthony says. “In normal circumstances, where inflows are coming into our funds, we take those inflows and -no matter the price that’s being charged -we buy. Even when prices are falling, we’ll be out there buying assets.” He says this helps put a floor on market drops and adds liquidity to the market in downturn.
Equity markets benefit from these long-term institutional investors, and so do infrastructure and property, the types of investments for which the government needs budgetary support. Unlisted assets -those not listed on public markets such as the ASX -play a crucial role in industry super funds’ investment strategies, delivering impressive, long-term, risk-adjusted returns for members.
“Not-for-profit funds are long-term equity investors: in listed assets on financial markets, but also in unlisted assets like airports, agricultural land and aged-care centres,” Anthony says. “Up to 20% of investments are in unlisted assets, and always for the benefit of members."
The government could choose to work with funds, leveraging these investments to buoy the budget in the face of years-long deficit.
Anthony outlines how this could work: “If you are the government and you are very cash-strapped, as at the moment, you can hand super funds a shopping list of projects you need built for the next 40 years and say, you go and build that, and pay us for the privilege to do that. That’s the uber-answer to many of the government’s massive budget problems.”
Super funds are a significant force for economic development in this country. “We will adjust asset holdings to accommodate strains in the economy,” Anthony says. “Then we will move forward again. We may have our hands tied behind our backs for a little while, but we’ll get into the market again.”
The success of this important economic rebuilding function relies on the funds’ confidence that policy settings are also in place for the long term.
The government’s early release of super scheme may have dented that confidence. It allows eligible Australians facing hardship to access two payments of $10,000: one before and one after 30 June.
Industry SuperFunds has supported this scheme and its intention to help Australians in dire financial need during this time. But Anthony sounds a warning: “There could be lasting consequences to the economy in permanently changing super’s core function. This may shift it from being an automatic stabiliser to almost a procyclical contaminant to financial stability. If we’re not in the market as the stabiliser, the reality is it may take much longer for markets to recover.”
For the economic slump to be avoided, the government must exercise caution when considering long-term changes. “The best response to a crisis,” Anthony says, “is for normalcy to resume as soon as possible. You don’t want never-ending small bites at uncertainty -green shoots with no recovery. The blueprint for economic success is an unchanging rulebook for operating the super machine. Stability through time consistency.”
In the meantime, he challenges the government to pursue structural reforms to get the economy moving again. “Its response now has to be smarter,” he says. “It has to rely on everywinner it has in the economy to drive the future forward.”
Find out more on how industry super funds will help rebuild the economy post Covid-19.
Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product Disclosure Statement available from individual funds before making an investment decision. Originally produced content by Guardian Labs Australia to a brief agreed with and paid for by Industry SuperFunds. The original content can be accessed here: https://www.theguardian.com/industry-superfunds-supercharged-future/2020/jun/25/supercharged-future-why-superannuation-is-crucial-to-the-post-covid-19-economic-recovery
*The above material, whilst correct at the time of publication may include references or statements which are no longer current.