Industry (Union) Super funds suddenly look a little bit less enticing

Over recent years ASIC has been busy trying to discourage people from putting their superannuation into a self-managed super fund (SMSF), even to the extent of running a dodgy 'education' campaign last year that presumed wildly inflated costs for running an SMSF (I think ASIC quoted a figure of around $10K pa to run an SMSF, while it is perfectly possible to run an SMSF for under $1Kpa - we do). At the same time, Industry (Trade Union based) superannuation funds have been spending copious amounts of their existing members money on TV advertising campaigns spruiking the safety, low cost, and 'not for profit' nature of their funds compared to the retail superannuation funds (mostly run by banks investment arms).

One of the worrying features of industry super funds was that they often invested in unlisted infrastructure assets, such as motorways, airports, etc. As these cannot be 'market priced' (as there is no liquid market for these assets - they get bought and sold in a single massive transaction from one investment fund to another), there was always some doubt about how realistically they were valued.  The fact that valuations were only 'estimates' often done on an annual basis meant that there also tended to be a lot of 'smoothing' of valuations taking place, which in turn meant that they appeared to have low price volatility, which then meant that they could be classified as 'conservative' investments (a bit of 'creative accounting' in some ways similar to the bundling of hoards of junk debt into a CDO with a better risk rating that occurred prior to the GFC debacle. Fund managers are always on the lookout for a way to turn a sow's ear into a silk purse).

The current Covid-19 crises has led to the government changing superannuation rules to allow members to make relatively modest 'early withdrawals' of their superannuation (prior to preservation age, which is normally close to pension age). This has obvious liquidity implications for funds that have made long term investments with limited liquidity on the assumption that most of the member's funds are 'locked in' until preservation age. An example is the recent announcement by Industry Fund Hostplus that they are amending the fund's rules to allow them to essentially suspend or delay member withdrawals. This seems quite similar to what property investment funds did (freeze withdrawals) during the GFC when they were unable to sell their investments (at a reasonable price) to satisfy the rate of withdrawals from the funds.

We'll see if and when Hostplus actually suspends member withdrawals, but it is certainly a potential downside to investing one's super in a low-cost, industry based superannuation fund. On the other hand, even an SMSF might have investments that prove to be illiquid in a crisis. While it is unlikely that a Vanguard Index fund would be unable to service withdrawal requests (as their investments are based on market prices), other investments (like property trusts) might suspend redemptions in a time of financial crisis. So SMSF trustees/members need to take liquidity into account when deciding their investment allocations.

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