COVID-19 fallout transforms national retirement systems into rainy day funds

Some national retirement systems have begun to look more like rainy day funds as the coronavirus continues to wreak havoc on the global economy.

Australia and Malaysia this week opened the door for citizens in those countries' mandatory retirement schemes to tap their savings as a means of getting through the savage dislocations resulting from efforts to contain the virus.

Australia's government on March 22 announced that unemployed Australians, including those either made redundant this year or facing a 20% reduction in working hours, will be able to withdraw A$10,000 ($5,800) from their nest eggs through the June 30 close of the current fiscal year and another A$10,000 in the first quarter of the new year.

The next day, Malaysia Prime Minister Muhyiddin Yassin said Malaysians will be able to withdraw up to 500 ringgit ($114) a month from their savings in the country's 924.75 billion ringgit Employees Provident Fund for the coming 12 months to help them pay their bills and put food on their tables.

For good measure, employees' mandatory EPF contributions — which were slashed to 7% of their monthly salaries from 11% at the end of February — were cut again to 4% through the end of 2020.

Both countries struck the same tone in explaining their moves, contending the measures announced were regrettable but necessary in light of dire economic circumstances.

"While superannuation helps people save for retirement, the government recognizes that for those significantly financially affected by the coronavirus, accessing some of their superannuation today may outweigh the benefits of maintaining those savings until retirement," according to an explanatory note on the Australian government's website.

Likewise, Alizakri Alias, the CEO of Malaysia's EPF, said in a March 23 statement "as a retirement fund, the EPF has to strike a balance between our mandate to safeguard our members' retirement savings, and caring for their well-being."

Some analysts say the latest moves by Australia and Malaysia shouldn't be seen as a significant departure from recent trends.

There's nothing special about early withdrawals from nest eggs at times of financial hardship, and this could simply reflect these organizations' growing mandate — from a narrow focus on retirement to a broader focus on members' financial well-being throughout their lives, noted Josef Pilger, a Sydney-based partner and global pension and retirement leader with Ernst & Young Global Ltd.

Still, observers in both countries noted the steep opportunity costs facing savers who draw down retirement accounts that have been gutted over the past month by plunging equity valuations.

David Elia, the CEO of Hostplus, a A$53 billion Melbourne-based industry fund for the tourism, hospitality and sports sectors, in an email predicted that "many members will not want to crystallize current losses by unnecessarily accessing their super accounts, so as to take advantage of the eventual recovery in investment markets."

Doing so may be unavoidable for some facing hardships now but the costs will be substantial, said Kirby Rappell, executive director of SuperRatings Pty. Ltd., a Sydney-based super fund research and ratings firm.

Mr. Rappell said his estimates show a 25-year-old who takes out the full A$20,000 permitted by the government would retire at 67 with A$132,000 less than he or she would have had otherwise. By contrast, a 55-year-old taking out A$20,000 would have only A$27,000 less than he or she would have had at 67, he said.

For Malaysia, tweaking EPF contributions to provide support for the country's economy is a lever the government has pulled before, as recently as the period between March 2016 and December 2017 when employees' mandatory EPF contributions were reduced to 8% from 11%.

For Australia, extending and enlarging the circumstances under which employees are able to gain hardship access to their retirement savings "in the middle of a crisis," sweetened further by eliminating the normal 22% tax on early withdrawals, is something new, said Nick Callil, Melbourne-based head of retirement solutions, Australia, with Willis Towers Watson PLC.

The moves have elicited strong push back from opposition politicians and labor leaders in both countries, who contend that cash transfers or concessionary loans are better suited to the moment.

Lim Kit Siang, a member of the Malaysian Parliament and finance minister in the coalition government that fell a month ago, called in a statement for the current government to provide "cash support from government reserves for Malaysians affected by the COVID-19 crisis."

In Australia, meanwhile, a statement issued March 24 by SuperRatings called on the government to "refine" its early access measure.

For some of the most vulnerable people in society the government's message is effectively, "use your own super to tide yourselves over and by the way, you'll need to take it out at a massive loss, which you can never recoup," said SuperRatings Chairman Jeff Bresnahan in the statement, adding "there must be a better way."

Still, in Australia, with significant numbers of people suddenly facing "a significant or total loss of income," it's difficult to be too publicly opposed to early access as one of a comprehensive array of measures the government has taken to help Australians fight through extraordinary times, Mr. Callil said.

AustralianSuper, a Melbourne-based industry fund with A$180 billion in assets as of late January, said in a March 22 statement "AustralianSuper believes that the superannuation sector has a role to play in these unique circumstances and ... will support the federal government's plan to provide members in financial hardship with early access to their superannuation."

Australia's Treasury appears to be anticipating about A$27 billion, or roughly 1% of super retirement assets, leaving the system, said Alex Dunnin, Sydney-based executive director of research and compliance at Australian financial industry researcher Rainmaker Information. At A$20,000 a person, that would amount to 1.35 million people — or almost 1 in 10 super participants — opting to take money out early, he said.

A Treasury spokeswoman couldn't immediately be reached for comment.