The COVID-19 crisis has caused many Australians to fall into financial distress. To help those doing it tough, the Australian Government announced the COVID-19 Superannuation Early Release Scheme along with their $66b stimulus package on March 21st. The scheme granted Australians access to up to $20 000 of their superannuation benefits, as long as one’s working hours/turnover reduced by at least 20% from the year before. Up to $10 000 was able to be withdrawn in the 19-20 financial year, and further $10 000 can be accessed until December 2020. Previously, early access to superannuation was strictly controlled and only granted under compassionate grounds (e.g. terminal illness) or due to severe financial hardship. The difference with the current scheme is that all withdrawals are tax-free (previously, the early release of superannuation benefits had always been subject to taxation). Data from the Australian Prudential Regulation Authority (APRA) show that superannuation funds had accepted 4.12m withdrawal applications, and $31.7b worth of payments had been paid out as of August 16th.
Before analysing the adverse impacts of the scheme, it is worth considering the intention of Australia’s superannuation system in the first place. Superannuation is money put aside during your working life for you to live on after retirement. At first glance, the Government’s early release scheme goes against this definition by granting workers access to funds before they retire.
Although the Government did not restrict how super withdrawals were to be spent, there were concerns that some Australians were using their withdrawals for online gambling. More worryingly, research by AlphaBeta and Illion found that 40% of super claimants did not see a drop in their income; the main criteria to be eligible for the withdrawal scheme. Although the system was designed to provide access to cash quickly, criticism of the application process arose because the release of funds was possible without any supporting evidence/documentation.
The impact on individuals
On an individual basis, the impacts of withdrawn super are not immediately apparent. Depending on the assumptions used, $20 000 in the super system today could grow to anywhere between $100 000 and $500 000 in 35 years. Even with conservative investment returns, losing access to $100 000 in retirement is substantial. An additional impact is the loss in income protection, life and TPD insurance if super balances fall below a certain threshold. This loss of cover could end up having a disastrous financial outcome in the future for those unlucky enough. Of course, it is unreasonable to make assumptions on individual circumstances. But the consensus among experts upon the scheme’s announcement was to explore other options first and to consider superannuation as a last resort.
The impact on superannuation funds
Initially, there were mixed reactions to the introduction of the early access scheme between super funds. Retail funds largely welcomed the program. Some industry funds, however, were more reluctant to embrace the scheme. Hostplus is a notable example. Hostplus’s members are concentrated mainly in the hospitality sector. Given that this sector was hit especially hard by the lockdowns, Hostplus was expected to face more requests for withdrawals than other funds. Combine the high demand for payouts with the firm’s portfolio of illiquid assets and it is no surprise that Hostplus’s initial opposition regarding the early release scheme was because they did not know how they were going to obtain sufficient cash to payout. Super funds that expressed concerns with the Government’s scheme were accused by senators and other funds of taking excessive risk with their investments and not allocating enough resources in reserve.
However, industry funds argue that the early access scheme contradicts the point of the whole superannuation system. They argued that superannuation is supposed to have a long-term focus to build wealth for their members’ retirement steadily. As such, it was pointed out that the expectation of fund managers to invest for the long run, while keeping significant cash reserves “just in case”, is unreasonable.
The answer to who is really at fault is a question of whether it was reasonable for super funds to anticipate the sharp increase in demand for withdrawals, given that the Government had never previously allowed non-retirees access to superannuation funds (even during the GFC).
What are the ongoing effects and considerations resulting from the scheme?
Increased cash reserves by large super funds in response to the super release scheme and the economic conditions resulting from the pandemic, are both expected to drive down this year’s superannuation returns. Industry fund members should expect to be worse off than retail fund members. This is because retail funds typically keep a higher proportion of their assets as cash and are more capable of paying out funds without affecting their allocation of investments.
For those who withdraw superannuation benefits, a lower retirement benefit in the future implies a greater reliance on the Government’s aged pension. Higher aged pension benefits offset some of the lost interest payments on the withdrawn funds. This means that those who withdraw funds as part of the Superannuation Early Release Scheme will shift some of the cost of their retirement onto taxpayers.
Super funds have two considerations to make regarding risk for the future: Do they have sufficient cash reserves to meet customer needs during future downturns? Is it worth “diversifying” their customer base into other sectors to avoid the impacts of industry shutdowns?
The debate of who is to blame for the super funds’ liquidity issues stemming from the super release scheme continues. Regardless of who is at fault, super funds have a big role to play in rebuilding the nation’s battered economy. However, super funds can only be of assistance if the government is transparent about potential economic policies in the future.
 Prime Minister of Australia. (2020). Supporting Australian workers and business. Retrieved from https://www.pm.gov.au/media/supporting-australian-workers-and-business
 COVID-19 early release of super. (2020). Retrieved 29 August 2020, from https://www.ato.gov.au/individuals/super/in-detail/withdrawing-and-using-your-super/covid-19-early-release-of-super/
 Early access to your super. (2020). Retrieved 29 August 2020, from https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-your-super/
 COVID-19 Early Release Scheme – Issue 17. (2020). Retrieved 29 August 2020, from https://www.apra.gov.au/covid-19-early-release-scheme-issue-17
 Super. (2020). Retrieved 29 August 2020, from https://www.ato.gov.au/Individuals/Super/
 Roddan, M. (2020). Early access super ‘gambled away online’. Retrieved 29 August 2020, from https://www.afr.com/companies/financial-services/early-access-super-gambled-away-online-20200520-p54us7
 Ryan, P. (2020). Superannuation withdrawals spent on gambling, alcohol, takeaway food: report. Retrieved 29 August 2020, from https://www.abc.net.au/news/2020-06-01/superannuation-withdrawals-spent-on-gambling-alcohol-takeaway/12306710
 Robertson, A. (2020). Half a million reasons to think long and hard before withdrawing your super. Retrieved 29 August 2020, from https://www.abc.net.au/news/2020-04-04/withdrawing-super-for-coronavirus-hardship-think-hard-beforehand/12119512
 Hughes, D. (2020). What to consider before an early raid of your super. Retrieved 29 August 2020, from https://www.afr.com/wealth/personal-finance/what-to-consider-before-an-early-raid-of-your-super-20200423-p54mje
 Kaye, T. (2020). The cost of early super access. Retrieved 29 August 2020, from https://www.vanguardinvestments.com.au/retail/ret/articles/insights/research-commentary/retirement-and-superannuation/early-super-access.jsp
 Vickovich, A., & Mather, J. (2020). AustralianSuper, retail funds back early super raid. Retrieved 29 August 2020, from https://www.afr.com/policy/tax-and-super/australiansuper-retail-funds-back-early-super-raid-20200323-p54czf
 Majaski, C. (2020). Illiquid Definition. Retrieved 29 August 2020, from https://www.investopedia.com/terms/i/illiquid.asp
 Vickovich, A. (2020). Illiquid funds ‘taking their clients for granted’: IOOF. Retrieved 29 August 2020, from https://www.afr.com/policy/tax-and-super/competitors-taking-their-clients-for-granted-ioof-20200406-p54hhu
 Burgess, M. (2020). Australia’s Biggest Pension Funds Say They Are Ready to Spend. Retrieved 29 August 2020, from https://www.bloomberg.com/news/articles/2020-06-30/australia-s-biggest-pension-funds-say-they-are-ready-to-spend
The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.