A pension fund can keep paying members through a market shock while those members suffer substantial investment losses. That distinction is essential to interpreting the latest warning about higher borrowing costs and Australia’s superannuation system.
In ABC’s 5 October reporting, Bank of America rates strategist Mark Cabana argued that persistent US growth and inflation could require tighter interest rates. The warning is conditional. It does not establish that Australian pension funds face an imminent funding failure, or identify a proven interest-rate threshold beyond which they would fail.
The more useful question is how market repricing would meet the system’s cash demands. Recent regulatory evidence suggests important buffers exist, but also shows why fund-level resilience and member-level outcomes require separate scrutiny.
The cash buffer and the account balance answer different questions
APRA’s final System Risk Stress Test report, published on 30 June, examined four major banks and six large superannuation funds. All participating institutions withstood its severe hypothetical shock. Within the simulated twelve-month period, however, investment losses reduced average member balances by around 25% for the median fund.
That figure is a scenario result, not a report of actual losses or a forecast for the coming year. It illustrates the difference between being able to honour payments and preserving the market value of an investment account. A fund can sell enough assets to make payments even when the price received is lower than before the shock.
The distinction also explains why a rise in bond yields can have different effects over different horizons. Existing fixed-rate bonds generally lose market value when comparable yields rise, while reinvestment can take place at higher yields. The balance between those effects depends on portfolio duration, the timing of cash needs and other holdings. A headline about rates cannot identify the outcome for every member or investment option.
Nor does passing a selected stress test prove that every fund would behave identically. The exercise uses specified shocks and institutional responses. Those assumptions are useful for finding weak points, but an actual episode could combine different market conditions, withdrawal patterns and operational constraints.
Selling overseas assets can protect domestic markets
The RBA’s October Financial Stability Review describes superannuation as a historical source of system stability. Compulsory contributions, limits on leverage and restrictions on early withdrawal support that role. It also reports that offshore investments account for around half of assets managed by APRA-regulated funds.
International listed holdings can supply cash without requiring a fund to sell the same domestic assets as banks or other Australian institutions under pressure. This spreads the potential source of liquidity across markets. The economic benefit is conditional on those markets remaining accessible and sufficiently deep when transactions are needed; diversification does not make selling costless.
Currency exposure complicates the picture. A weaker Australian dollar can increase the domestic-currency value of an unhedged overseas holding, while foreign-exchange hedges can generate cash obligations. The RBA notes that hedge maturities are generally staggered and only a small share requires daily margin. It would therefore be misleading to assume that every overseas investment immediately creates an equally large collateral call.
The relevant comparison is between cash that is needed at a particular time and cash that can actually be accessed then. An asset may remain valuable without being available for prompt sale. Even a deposit or money-market holding can have contractual features that make its access different from an unrestricted cash balance.
This is also a system question. A fund protecting its own cash position by withdrawing bank funding can make that bank’s funding task harder. Conversely, a long-term investor able to supply capital can cushion a wider shock. The direction depends on the stress and the response, rather than on the mere existence of a financial link.
The portfolio left behind can become harder to sell
APRA’s exercise found that the share of illiquid assets in default MySuper options increased more than in other options for most participating funds. Selling liquid assets helped meet cash demands and avoided further immediate sales of illiquid holdings, but shifted more liquidity and sequencing risk toward the members who remained in those options.
The arithmetic can matter without any new purchase of illiquid assets. If listed assets are sold to meet withdrawals while less readily tradable holdings remain, those remaining holdings become a larger part of the portfolio. A later wave of withdrawals would then meet a different starting allocation. The first response can be workable and still leave the next response more constrained.
Valuation is part of fairness between members. If prices of less frequently traded holdings do not reflect changed conditions promptly, a switch or withdrawal could occur at a value that distributes losses unevenly. That is a conditional risk, not an allegation that a named fund currently misprices its assets. APRA’s in-force SPS 530 standard requires liquidity planning and valuation governance, including a board-approved policy and triggers for interim valuations.
The substantial counterargument remains the system’s stable contribution base and liquid investment resources. Those buffers should not disappear from the analysis merely because a strategist warns about rates. Equally, evidence of cash access should not be described as protection from market losses.
The assessment would change with evidence about actual switching, cash-access times, valuation updates and the allocation remaining after withdrawals. For a maturing pension system, the quality of that response matters alongside the ability to survive the initial shock: resilience has to be examined from the member’s account as well as from the fund’s balance sheet.