“The problem with socialism is that you eventually run out of other people's money .” Margaret Thatcher

As of 30 April, the ATO has approved 900,000 superannuation fund members to withdraw $7.5 billion of funds from their superannuation balances. This is an average withdrawal of $8,333 per member compared to the maximum of $10,000 that can be accessed from 20 April to 30 June (with another $10,000 available from 1 July to 24 September). Government estimates put the total likely drag on superannuation balances at about $29.5 billion, while some other estimates suggest the number could be as high as $50 billion. Much will depend on how quickly the bulk of the economy can get back to work through mid-year.

UBS has published some interesting research looking at the impact of this on average members’ cash balances. According to UBS, “most super funds have sufficient cash buffers to meet withdrawal requests…and still remain within asset allocation targets”, with the median superannuation fund holding $10,544 average cash balance per member (so, coping with the current withdrawal phase). Of course, once they consider the super funds with low average cash balances (where the 25th percentile has cash of only $3,696 per member) and those funds with a higher share of younger members, there may be pressure to sell equities (or even illiquid assets) to fund redemptions. Of course, $29.5 billion in withdrawals represents only 1.1% of assets held in super and $8 billion of equities (just over an average day’s total volume on the market), according to UBS equity strategy. The current $7.5 billion withdrawals approved by the ATO is thus just 0.3% and $2.2 billion.

However, the other interesting point UBS draws out, which is our chart today, is that over the past couple of years, member contributions have decreased while withdrawals have increased. The drivers of this are not hard to find. In terms of inflows, that’s likely to reflect both lower wage growth, as well as government policies restricting concessional and non-concessional contributions to super. The pick-up in outflows likely reflects, in part, ageing demographics and more people entering pension phase (as well as no longer contributing). As UBS shows in the chart below, the consequence is that in 2018-2019, distributions, dividends and interest have grown to be more than 90% of the cash flow available for super funds to invest each year (with only 10% from net member contributions).

Fast forward to today, with unemployment likely to rise and wages fall, contributions are likely to be under further pressure at the same time COVID-19 withdrawals are likely rising. Moreover, if dividends are also being cut or delayed, this will further pressure superannuation funds’ investible flows. UBS estimates these could fall by half in the next 12 months (from $89 billion to $44 billion). This, of course, could be a modest negative demand impact for domestic equities (and ease selling of the Australian dollar to fund global equities), albeit the fall in equity prices is also driving some positive equity demand through rebalancing asset allocation targets.

Distributions, dividends and interest account for more than 90% of super fund ‘cash flows’ in FY 2019

Source: APRA, UBS, distributions, dividends and interest estimated for SMSFs.

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