RBA to bail out industry super funds

Originally posted by Osi ↑

I'm not sure what the thread heading actually means.

Members take the risk with industry funds these days. That means if a member had $500K balance in fund XYZ 4 months ago and you have a $300K balance now they have made a paper loss of $200K. The only impost on the fund is that they can now only retrieve fees on the lower balance.

I looked at an industry Defined Benefits (DBF) fund post GFC and raised a red flag on it. Back then that fund (which was employer owned) "sort of" guaranteed defined benefit payments to retired members and there wasn't quite enough money in the kitty to do that for long. All sorts of alarms were triggered , letters were sent to many thousands of current and retired members and TSHTF ….. well nearly. It was close. Thanks to the emerging market generated rebound and some global money printing this particular DBF survived. Up until now the retirees have received their expected payments.

What happened next? With the endorsement of financially illiterate union leaders the employers shifted ultimate liability for DBF losses from themselves to members. So if it happens again the members loose a proportion of their fortnightly payments and the fund survives to lose member money another day.

OK what does happen next? Unlike 2008 there are no emerging markets growth drivers. There are no growth drivers beyond the innovative capacity of some individuals. I see smaller emerging markets as the likely first (collateral) domino to fall within the global finance space. When these markets fail, many EU banks will go with them. If that looks likely, intrabank credit will freeze and the risk premium on corporate bonds will climb sky high. The banks will mostly survive because governments will stuff their balance sheets full of newly created money. On the other hand a many retirees will become more dependant on Centrelink. Further to that, the purchasing power of Centrelink payments must decline because taxpayers won't be able to afford the current impost.

IMF to the rescue? The IMF will certainly try to save some sovereign governments from default. Will this be enough? My gut feel is that the debt bombs (both public and private) within these markets are simply too expansive. I don't have a breakdown of the debt in my head but I expect total global debt to be something over USD300t. The official amount is in the order of USD250t but there is a lot of shadow finance out there which isn't necessarily in the tally.

Have I missed anything?

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Don't attempt to read too much into the heading, it's quite old now and information flows are becoming far more rapid, any heading more than 24hrs old has become lietrally redundant at time of posting.

However it was a quite simplistic observation that industrial funds were furious at the governments relaxing of the withdrawal criteria for members leading to a potential liquidity issue for the major funds, hence they were forced to write down their unlisted holdings.

My only point was that as trustees of other peoples money industrial funds should NEVER be in a situation of being illiquid, they sign an ASIC declaration each year stating that.

Being a trustee of my SMSF if I declared I was liquid, and then due to some unforeseen circumstance I became illiquid ASIC would close my SMSF down, I would get and fine and potentially goaled depending on the circumstance.

It's just ironic that the very people who want SMSF's shut down are the ones now wanting help with their liquidity issue because of their poor mgt of assets.