(Bloomberg) -- Australia’s central bank warned that the surging growth of the nation’s A$3.9 trillion ($2.7 trillion) pensions industry has created new risks to the stability of the country’s financial system.
The growth of the sector, known locally as superannuation, meant it was now increasingly tied with the banking system and financial markets, the Reserve Bank of Australia said Thursday. The funds now hold nearly one-third of Australian banks’ short-term debt securities and over a quarter of equity issued by domestic banks, according to the RBA.
“Consequently, superannuation funds have the potential to amplify shocks in the financial system,” the RBA said in its half-yearly Financial Stability Review. “This could occur if the investment actions of superannuation funds were to become more correlated or concentrated in times of generalised market stress – for example, in response to members’ correlated reaction to a shock.”
The RBA cited the example of pensions selling large amounts of debt securities back to issuers during the pandemic, saying that drove up funding costs across the financial system. As more people retire and draw down their savings, that will also bring new challenges for liquidity management, the bank said. It also warned about the industry’s increasing exposure to offshore assets.
“The management of liquidity demands resulting from margin calls on foreign exchange hedges (when the Australian dollar depreciates) will become increasingly important as foreign assets are expected to comprise a larger share of superannuation fund investment portfolios,” the report said.
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The RBA warning landed on the same day that AustralianSuper, the country’s largest pension, announced the appointment of its first chief liquidity officer. Chandu Bhindi, who joins from the Commonwealth Bank of Australia, will help manage liquidity and risk across the fund’s “whole range of assets,” Chief Investment Officer Mark Delaney said on Thursday.
Australia is home to the world’s fastest-growing retirement system, with industry assets forecast to top A$13.6 trillion by 2048, according to a Mercer report. It sees a dozen funds controlling more than A$100 billion each by 2028, driven by mergers, organic growth and investment performance. The industry is expected to continue to grow faster than Australia’s overall financial system, the RBA said on Thursday.
Sonya Sawtell-Rickson, CIO of A$87 billion fund HESTA, said it was understandable that the RBA would place a greater focus on the sector’s massive growth. She also highlighted the RBA’s comments that Australia’s funds are restricted in the ability to borrow, unlike the UK, where pensions’ leverage was a key driver of stress in the government bond market two years ago.
“I can definitely talk for ourselves, that we have a very robust liquidity modeling, stress testing program focusing on the near-term, medium and long-term liquidity requirements,” Sawtell-Rickson said in an interview Thursday, adding she felt HESTA was “in a pretty good place.”
Australian pensions have become global players, investing around a fifth of their money in private markets. That’s drawn scrutiny from regulators, who have warned funds they’re taking a closer look at their unlisted investments.
The Australian Securities and Investments Commission is setting up a specialized unit to engage with private markets, while the Australian Prudential Regulation Authority has repeatedly raised concerns about the frequency of valuations and disclosures for unlisted assets.
The RBA said unexpected liquidity calls, abrupt policy shifts or margin calls on foreign exchange hedges “could lead to synchronised asset sales in some domestic markets as funds attempt to raise cash quickly.”
(Updates with expected growth in 7th paragraph. An earlier version of this story corrected Mark Delaney’s job title.)
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