Australia’s central bank warned that super funds’ surging appetite for foreign and private assets potentially poses a risk to the country’s financial system.
With almost half of industry assets now invested offshore, an unexpected crisis might force the A$4.2 trillion ($2.6 trillion) superannuation industry to secure liquidity in ways that could worsen stress in financial markets, the Reserve Bank of Australia said in its half-yearly Financial Stability Review on April 3.
For example, a large, sustained drop in the Australian dollar could lead to margin calls and a renewal of foreign exchange hedges against overseas assets, it said.
With millions of Baby Boomers set to retire in coming years, net inflows to the country’s super funds are expected to decline over time. At the same time, with the industry forecast to grow faster than Australia’s economy, funds will be forced to invest in more foreign and difficult-to-sell private assets, the report said.
If large amounts of those retirees were to abruptly withdraw funds in a crisis, that could also create liquidity pressures for funds, it said.
“The largest superannuation funds report that the majority of their inflows are now being invested in foreign assets,” the RBA said. “In the years ahead, managing liquidity risk could become more challenging as the sector matures.”
About a fifth of Australian supers’ investments are currently in private markets, including long-term assets such as airports and toll roads. The central bank has previously warned the surging growth of the industry has created new risks to the stability of the financial system, and said it was honing its focus in remarks at an industry conference in January.
The RBA expects the Australian Prudential Regulation Authority’s financial system stress test, to be conducted this year, would help it to understand systemic risks. It also said that funds needed strong governance to oversee liquidity and operation risk management, which is currently a focus of regulators.
