COVID-19 Impact To Superannuation Trustees And Members - Economic Survival
Now, more than ever, members of superannuation funds are going to need the superannuation industry to be there for them. This comes at a time when the operations, investments, and finances of superannuation funds will be subject to severe and quickly evolving challenges.
This article shares initial thoughts on what superannuation trustees should be thinking about, and what they might be able to do to best position themselves to navigate the COVID-19 pandemic (and related economic carnage) with compassion, prudence, and a sense of purpose.
The challenge ahead may be intimidating, but it is also an opportunity for superannuation funds to engage with and serve their members' best interests in a period of uncertainty, temporary retirement, social distance and self-isolation.
Photo by Claudio Schwarz | @purzlbaum on Unsplash
A regulatory response for economic survival
Parliament has announced its intention to passes measures which will involve the superannuation system. It's unlikely that the measures are the last.
These measures are likely to pass Parliament promptly by 24 March 2020:
Extending the existing compassionate grounds early release requirements to allow access up to $10,000 (tax free) for the current and next financial years for eligible members. Eligible members will be those who are unemployed, have had their role made redundant, are in receipt of a social security benefit, or have seen a decrease in working hours of at least 20%. Importantly, the amendments do not specify any minimum documentation or evidentiary conditions for meeting these requirements. Individuals will self-assess their eligibility to apply for a determination directly to the ATO via MyGov.
Providing pensioners with account based pensions with flexibility to adjust their minimum draw down thresholds by 50% in the current and next financial year (as in the global financial crisis) to avoid mandatory asset sales during the market downturn.
Reducing the social security deeming rates (including the age pension) 50 per cent for the 2019-20 and 2020-21 income years. As of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent.
Granting treasury powers to provide relief from certain obligations under the Corporations Act for up to six months) which might be difficult (or impossible) to comply with under the current environment. There's no further indication what these obligations may be at this stage.
These changes will need to be implemented swiftly and accurately to policies, procedures, and administration systems of superannuation trustees and their key suppliers, placing a strain on resources already under pressure implementing a heavy agenda of regulatory reforms.
There are also likely to be further change affecting the superannuation system in subsequent tranches of economic relief packages. The existing agenda for regulatory change which include reforms commencing from 1 July 2020 to implement recommendations of the Hayne Royal Commission is likely to be deferred, with APRA already indicating that it's regulatory agenda on hold.
In this respect, APRA has indicated that it is suspending all substantive public consultations and actions to finalise revisions to the prudential framework that are currently underway or upcoming, including consultations on prudential and reporting standards. It will keep the situation under review, but presently does not plan to recommence consultation on any non-essential matters before 30 September 2020.
A sudden pivot
The magnitude of the economic shift, and the resulting response from government will undoubtedly result in a sudden pivot or management and strategic attention towards activities which will inevitably and undoubtedly need to be prioritised by superannuation funds.
Superannuation trustees will need to act quickly to ensure that the member service and financial advice functions are adequately resourced and equipped with the necessary information and support in dealing with huge increases in the needs of their members. Members are likely to be experiencing unemployment or financial hardship at the same time as the health and distancing measures presented by the pandemic.
Tragically, there may also be an increase in claims for death benefits resulting from the spread of COVID-19 and the resulting strain on the medical and hospital resources. Superannuation funds should be considering measures to ensure adequate resources are in place to manage these claims as efficiently and diligently as possibly.
Superannuation trustees should also consider proactive campaigns to communicate with members what superannuation funds can do to support members during such difficult times will also be critical over the coming weeks. After years of trying to encourage members to engage, superannuation funds will find that members are eager to engage when they really need to.
Working from home
The challenges faced by superannuation funds would be profound under normal conditions. This is greatly pronounced by the fact that the work forces of superannuation trustees and their material service providers are shifting to contingency planning, with most staff being also required to work from home.
Recent investments in cloud based working technology will prove invaluable in enabling many employees to work from home. However, there will be some employees involved in core infrastructure support and direct member service such as contact centres that may still need staff to attend on site.
Employees of superannuation funds will inevitably contract COVID-19, or need to care for family members who have. Many more will need to deal with the challenge of adjusting to working from home with family, and the general stress caused by the pandemic.
The superannuation industry is serviced by a wonderful workforce of smart and hardworking professionals with a broader social purpose. Even still, ensuring the effective management and operations of superannuation funds will throw major challenges to funds that are working under difficult conditions.
Liquidity
The significant increase in benefit payments arising from financial hardship, compassionate grounds, and death benefit claims may present a liquidity risk for trustees. Contribution flows are also likely to slow, as unemployment and underemployment rises sharply.
This comes at a time where the rush to cash has seen equity and debt investment asset values contract. The sudden and acute economic contraction has been, and may become chronic, and continue to be severe.
While typically long-term investors, the increased demand for benefits will require that superannuation funds closely monitor liquidity of cash reserves - and possibly adjust asset allocations and sell down some assets in a market which will realise potentially significant capital losses.
Superannuation trustees are undoubtedly already enacting measures to control liquidity risks, while balancing the longer term needs of protecting the value of assets held. While some funds are invested in unlisted and infrastructure assets which are rather illiquid, the allocation to these assets is unlikely to create any uncontrollable liquidity issues in the short term. Ongoing and close attention will however be critical over the next few months.
Shrinking fee revenue and calling on the ORFR?
The fee revenue deducted from member accounts to fund the operation of superannuation funds is sometimes linked to asset values - and may contract materially for some funds with the recent falls in asset prices. This may see that some funds may need to increase fees, or consider one off fees to ensure fee revenues cover the costs of operating in difficult times.
The use of a fund's Operational Risk Financial Requirement (ORFR) reserve is tightly limited to circumstances where "a cost has only materialised as a result of the operational risk event and payment of the cost in a timely manner is essential to ensure that the loss is properly addressed and members do not incur large one off expenses." It doesn't look likely that the ORFR reserve would be called on in such circumstances, and legal advice would be required if it is being contemplated.
However, if circumstances of an acute squeeze on operational costs eventuated and the ORFR reserve could not be utilised, the Trustee could request APRA to adjust or exclude a specific prudential requirement to enable it to recover these amounts from the ORFR reserves. Let's hope things don't come to this, but it doesn't hurt to start thinking about it.
Raison d'être
The superannuation system exists to help Australians save for and provide income in their retirement. Some reluctance at setting a precedent to allow early access is unsurprising, and such scrutiny is essential. Yet, ensuring that superannuation funds are there for Australians when they need it most is not only the right thing to do, but an opportunity to build trust and contribute to preserving some longer term financial stability for members.
Jonathan Steffanoni - Partner at QMV Legal.
If your organisation needs assistance with superannuation law and compliance, QMV Legal can help.
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