Australia’s fast-growing A$3.9 trillion ($2.6 trillion) superannuation industry is contributing to a higher chance of large market gyrations due to the increase in private-market investments, according to an analysis by the International Monetary Fund.
Some super funds have raised allocations to illiquid private equity and credit to more than 20%, the IMF said in its Global Financial Stability Report released on Oct. 23. With the world’s highest share of defined contribution plans, allowing members to quickly switch investment options, the IMF identified a “liquidity mismatch” that may have an impact “in a liquidity stress event.”
That stress “could spill over to financial markets, especially those markets in which pension funds and insurers have a large footprint, such as government bonds, equities and corporate bonds,” according to the report.
The IMF warning comes after the Reserve Bank of Australia used its half-year review of financial stability to say the superannuation system had the potential to amplify shocks in the financial system. The RBA cited the example of pensions selling large amounts of debt securities back to issuers during the pandemic, driving up funding costs.
Regulators and investors are assessing risks in Australia’s super system, which is regularly cited among the top performers globally, at a time of tremendous growth. Industry assets are forecast to exceed A$13.6 trillion by 2048, according to a Mercer report.
Industry data shows one fifth of assets are in unlisted markets, including infrastructure and real estate. The IMF said several countries had recently introduced initiatives to encourage more investment in illiquid assets.
The IMF noted the share of defined-contribution pensions and unit-linked insurance products like annuities has risen globally in recent years. It said in the U.S., annuities have also increased their allocations to illiquid investments, but not in European unit-linked insurance products.
