Liquidity plans rare and underdone at super funds

Many superannuation funds appear underprepared to manage the liquidity risks attached to their funds, findings of a survey published by the Australian Prudential Regulation Authority show.

Surprisingly, around two thirds of super funds do not fully budget for cash flows, around half of funds do not analyse their membership data to predict fund flows, and few funds take the trouble to model and stress test their liquidity management plans.

APRA yesterday published findings of a survey of superannuation funds in its periodic Insight publication. The regulator received 422 completed questionnaires. It said153 retail, 69 industry, 180 corporate and 20 public sector superannuation funds returned the survey.

Among key findings:

* Only six per cent of trustees conducted formal stress testing of their liquidity plans.  
* 14 per cent of trustees actively monitored liquidity for the investment choices they offer to members.  
* 12 per cent of funds did not expressly deal with liquidity risk in their risk management plans  
* 36 per cent of the responses showed that trustees prepared formal budgets for cash flows.  
* Around 52 per cent of the responses indicated that trustees undertake analysis of membership data to predict future transactions.  

A key issue for super funds is that they may be unable to adequately manage the withdrawal of funds when a fund member exercises their right (admittedly rare, in practice) to switch their super to another fund.

A second issue is that in some cases funds have 100 per cent of their funds, for select investment options, invested in a single asset - often a mortgage fund that froze redemptions in late 2008 at the height of the financial crisis and which remain frozen.

Overall, the information provided at investment option level has highlighted the liquidity issues that can, and do, exist at the level of investment options offered to members.

In the majority of cases, the responses indicate that the number of illiquid investments appeared to be reasonable. However, it was dependent on the specific circumstances of the fund as to whether the number of illiquid investments within a default investment option was appropriate.