Relaxed superannuation preservation rules will sink returns: Frontier

A Frontier report, commissioned by the Super Members Council, has argued that current preservation rules provide super funds with the flexibility to invest in unlisted assets, and warned that permanently relaxing these rules will decrease long-term returns for members.

The asset consultant noted that unlisted assets, which diversify portfolios largely comprised of traditional assets and have historically performed strongly, would need to be reassessed in super funds' portfolios if changes to relax preservation rules were made.

It said funds would need to reassess their structural illiquidity exposure, in particularly, increasing cash holdings to offset the continuous sale of assets for withdrawals.

A sustained policy change to preservation rules would create a new "business-as-usual" environment for funds, forcing them to reassess liquidity management strategies, including the buffers needed to navigate stress events, it said.

Frontier said such a shift could worsen the impact of future financial shocks on members, reducing funds' ability to seize investment opportunities during downturns, as they would need to reserve more cash for redemptions and maintain larger buffers due to heightened withdrawal volatility.

It could also lead to increased asset liquidations at lower values, crystallising losses, limiting sale potential, and triggering higher transaction costs and tax liabilities.

Moreover, that kind of policy shift threatens to undermine the traditional role of funds as counter-cyclical investors, potentially driving more pro-cyclical behaviour and amplifying risks within the economic and financial system.

"Counter-cyclical investing has benefited the economy by injecting liquidity into the market during downturns, buying when others are selling, and recapitalising Australian businesses, including banks," Frontier said.

Frontier added that changes to preservation rules would be an additional constraint to funds' investment strategies and would decrease their ability to act as long-term investors.

"A reduction in unlisted asset exposures would curtail the retirement benefits of superannuation members. Long term returns from superannuation funds would be expected to decline if funds moved from unlisted assets to comparable listed assets," Frontier said.