A small number of superannuation funds unable to fund their liabilities could trigger a significant systemic risk in the superannuation industry, according to Mercer investment consulting business leader Simon Eagleton.
"The single biggest risk facing this industry is liquidity mismatch risk," Eagleton told a Mercer conference this week.
Liquidity mismatch risk occurs when a superannuation fund is unable to fund its liabilities, such as transfer rollovers and member option switches.
"The problem, of course, is that most super fund assets are not as liquid as their liabilities," Eagleton said.
Therefore, the liquidity mismatch had the potential to lead to systemic risk, he said.
"It is entirely plausible that a single fund finding itself in liquidity stress could lead to a contagion effect engulfing the industry," he said.
This would result in systemic risks that include loss of confidence in Australia's compulsory superannuation system, a growing move by fund members to use cash options and lower voluntary contributions.
Eagleton said the top-performing funds in Chant West's latest survey had exposure to illiquid assets that was three times the broader industry average.
The top eight performing funds in the survey had on average a strategic weight to illiquid assets of 27 per cent, with three of the funds holding more than 36 per cent in unlisted assets.
"So clearly we have a liquidity mismatch," Eagleton said.
To reduce the systemic liquidity mismatch risk, he said greater disclosure was needed.
Superannuation funds should move towards full and truthful public disclosure of their liquidity position, he said.
A regulatory constraint on asset allocation of illiquid assets was not the answer as it would only lead to sub-optimal investment outcomes, he said.
"My view is that the most sensible regulatory response is to enforce much better disclosure of liquidity issues than we have at the moment," he said.
