In the News

Revaluation Looming On Superannuation Books

Herald Sun - 3/9/2009

There is a classic mispricing discrepancy that has the potential to rob millions of superannuation members of billions of dollars. Different types of super funds value the long term assets they hold in their funds in different ways. Some funds hold property, infrastructure and private equity in their funds and these assets are priced to prevailing market conditions every day by be listed on the market. Other funds hold direct property, infrastructure and private equity holdings that they may only revalue annually or every couple of years.

Listed property, infrastructure and private equity has been marked down by over 60% to reflect the impact of the global financial crisis along with the price falls in shares. This has of course meant that the valuation of these super funds has been much lower over the last year and these funds are showing very poor immediate past performance in the league tables.

Many people have recently looked to move their money to what they perceive have been better performing funds. The funds showing little or no falls in value have been the funds that have elected to hold their property, infrastructure and private equity directly instead of via the more transparent pricing of a listed vehicle. Often these funds recent past performance have been spruiked by their representatives as evidence of some magical brilliance on their part to avoid losses and be a better alternative choice in the choice of super regime.

Paradoxically, the very funds that people are being encouraged to switch to (based on their unrealised losses not being evident) are about to be revalued. This is misleading and dishonest in the extreme on the part of those extolling the virtues of the recent performance discrepancy. Many smart members of the funds, who realise the impact of the inevitable devaluations that will have to occur, are able to switch their default fund to a cash option or rollover to another fund prior to the pending devaluations. These people will receive the inflated valuation if they exit quickly enough and cause the remaining members and new members switching to the fund to bear a disproportionate share of the losses.

There is over $30 Billion of unlisted property held in these funds that are mostly in the not for profit industry funds and corporate super funds. When listed vehicles holding the same assets fell by 57%, the valuations of the non listed holdings were shown as an increase of 0.1% in these funds accounts according to consultancy group Mercer. Over the last eighteen months there have been very few sales of large buildings to give comparative valuations mainly because of fund owners fearing massive price cutting are concerned they will have to mark down their entire portfolio.

Many of the mega funds in the superannuation industry are trying to justify the lack of write downs by arguing that the underlying price and cash flows adequately reflect their valuations but these arguments do not stack up in the current environment. This is becoming increasingly clear and as the trickle of members switching to less overvalued funds becomes a flood there will be a number of funds that will face liquidity problems because members are free to switch out of investment options containing high levels of unlisted assets.

Deceiving new investors to enter their funds with claims of superior short term past performance will not be enough to offset the flood of money heading for the exits while there is still time. Unfortunately, the vulnerable victims will be those trusting souls who will be looking for the not for profit funds to be protecting their interest rather than their own ideology.

There is a strong argument in the interest of treating all members equitably that the funds should move immediately to freeze assets until the underlying assets are properly revalued but this would require the fund trustees to fess up to holding ridiculously overvalued assets in the first place. In the interim there is a window of opportunity for members to get out while they can.

Some of the larger funds have only now begun the process of devaluations. The evidence points to the fact that there will be a race for many of the smarter members of these funds to get out either before the drops in value come or there is a move to freeze redemptions in the interest of treating all members equally. If you stay to face the music, don’t say you weren’t warned.

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