fighting the big freeze

Fighting the big freeze

Illustration: Suzanne White
JOHN COLLETT

Almost six years after many Australian retirees' savings were frozen in mortgage and property funds in the wake of the global financial crisis, almost all those investors are still waiting to get money back, with more than $5 billion locked up in zombie investments.

The big fund managers, such as AMP, Perpetual and Australian Unity, have told Fairfax Media that between 80 and 95 per cent of money has been repaid.

However, for many investors in smaller funds, the progress has been slower.

Octogenarian Pam Nicoll invested $80,000 in one of the smaller mortgage funds about 15 years ago. ''It seemed like a good deal at the time and my financial adviser said it was a safe investment,'' she says.

The adviser later told Nicoll that she had better get her money out, but it was too late as the fund had already been frozen. She has received back $30,000 so far, and does not hold much hope anymore that she will ever see the remainder. ''I am 80 and, at this rate, I will be dead by the time I get the rest of it.''

If investors satisfy a condition of hardship, such as not being able to meet immediate family living expenses or medical costs for serious illness, or in the case of permanent incapacity, funds are required to pay back up to $100,000 in a calendar year. While Nicoll is not facing hardship, she worries that she does not have money available to meet unexpected costs, such as health expenses.

Mortgage funds were popular with retirees because they paid steady interest, while keeping the capital invested stable. In late 2009, there was more than $15 billion in frozen mortgage funds and a further $10 billion split evenly between frozen property funds and frozen cash-enhanced funds.

A spokesman for the regulator, the Australian Securities and Investments Commission, says there is still more than $5 billion in frozen funds, mostly in mortgage funds.

The problem began when the government, as part of its response to the financial crisis, introduced its guarantee of bank deposits in 2008. Nervous investors started pulling money out of mortgage funds to invest in term deposits covered by the guarantee. This brought to the fore a fundamental problem with the funds: they offered daily withdrawals to investors but lent the money as residential mortgages and loans to property developers, repaid over several years.

That had never been an issue because the funds had sufficient cash buffers to pay normal levels of withdrawals, but after many more investors put in requests to retrieve their money, the funds could not raise enough to repay all the investors at the same time.

Later, it became clear the funds were no longer viable as they were likely to remain on the nose with investors - so fund managers decided to terminate them. Most offered quarterly redemption windows to investors, with a cap on how much of their request for withdrawals could be met as the loans matured. They have mostly kept making interest payments to investors.

Even though the funds have been frozen since 2008, fund managers have continued to collect investment management fees, because they say the funds still have to be managed.

Many small mortgage funds attracted investors by advertising on television and radio. Funds that relied on financial planners to recommend their products continue to pay them commissions.

While the large funds say they are on track to repay all their investors' money by the end of next year, investors in some of the smaller funds have faced, or will face, capital losses. That may be because those funds lent to higher-risk property developments that have suffered problems, or they did not diversify their loans sufficiently.