Cut services or increase fees, super funds warned

By Cameron Micallef

March 20 2020
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A new report looking into the impact of market volatility for superannuation has warned a number of funds to make drastic changes to ride out the impacts of COVID-19.

Rice Warner analysis has found a number of knock-on effects from the virus-induced global market sell-off, including a rise in members’ inquiries and demand for services, with funds suffering falls in fee income.

Chant West data showed that the median growth fund (61 to 80 per cent in growth assets) experienced losses of 3.1 per cent in the month of February, with forward estimates showing falls of 10.5 per cent in March.

Increased levels of inquiries from members around reduced asset values will be a challenge if funds’ staff are largely working from home and outsourced service providers are operating less effectively than usual, Rice Warner noted.

Most funds also subsidise their operational costs from asset-based fees on their investment portfolio.

With the market downfall, contributions to fee income will have fallen considerably, and a number of funds will now be in a position where they “need to cut services or increase member fees”, Rice Warner cautioned.

“At the same time, demand from members for services will be spiking due to the current volatility and uncertainty,” the report commented.

“We expect this might tip some of the smaller funds into merger negotiations – but they may find the climate a lot less amenable than a year ago.”

However, for large funds and consultancy businesses, it will be “business as usual”, the analysis noted, with the industry preparing to comply with new and pending laws.

Further, funds will be impacted by members losing jobs – some will be forced into early retirement at a time when their super balance has fallen.

Experts, including Westpac chief economist Bill Evans, said the unemployment rate could rise to 7 per cent by October 2020 due to a larger negative shock to the labour-intensive sectors such as recreation, tourism, education, renovations and additions, as well as dwelling construction.

“This lift in the unemployment rate is despite reducing the participation rate from 66.1 per cent to 65.4 per cent as a discouraged worker effect – that is, as workers respond to a deteriorating labour market, the participation rate is likely to decline,” the economist explained.

The impact of coronavirus on manufacturing and supply lines – as well as business confidence – could see the Asia Pacific thrown into a recession, according to S&P Global Ratings.

“An enormous first-quarter shock in China, shutdowns across the US and Europe, and local virus transmission [guarantee] a deep recession across Asia Pacific,” said S&P APAC chief economist Shaun Roache.

“Although assets values will recover, they are unlikely to recover quickly to the record levels they reached immediately prior to the latest plunge,” Rice Warner said.

“The price/earnings ratios were at historically high levels, largely due to the record-low interest rates. We should return to more realistic valuations based on prospective earnings. That will be a shock for many start-ups and tech businesses, which were valued on the promise of global growth rather than profit.”

Will the markets recover soon?

Some fall in markets was not unexpected as prices had reached record levels. However, prices have fallen sharply, exacerbated initially due to closure of short-selling and margin lending positions, but the absence of any institutional buyers and negative sentiment has prevented any short-term rally.

As what happens with momentum, the losses are across the board – even the prices of funeral companies and medical businesses have fallen.

It looks like China will be back to business as usual soon, but its trading partners will all then be in the peak of the pandemic. Realistically, we will have a few months of pain, and financial year returns will be low or even negative, Rice Warner concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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