I have previously touched on the possible ramifications of the early release scheme, the potential precedent it sets for trustees as they determine their investment approach, and the likelihood that it will incline trustees to increasingly conservative investment strategies. However, now that the initial shock of the Coronavirus crisis has passed, and the early release scheme is running fairly smoothly, it’s time to look at the likely longer-term impacts of the crisis, including how superannuation funds invest members’ funds.
So, acknowledging that it is a little early for answers, what are the questions we should be thinking about as we consider the broad adjustments the crisis may trigger in the economic outlook?
The first that springs to mind is whether the crisis may make businesses more reluctant to adopt a highly leveraged business model for expansion or mergers and acquisitions, as many of these businesses have been the hardest hit, at least in the short term. It is hard to guess at what sort of constraints this will impose on future business activity, but it is hard to see it as a stimulus for innovation and risk-taking.
The crisis also seems to have reenergised and provided support for the idea of protecting certain industries or supply chains for the sake of national security. Quite how strong this sentiment is and how far it will go is anybody’s guess, but embarking on this course risks efficiency and, if it gains hold around the world, will be highly disruptive to trade. Twenty countries producing the same product may be a safeguard against loss of access to that product, but it will also mean loss of scale, and the diversion of resources that might be better employed elsewhere, as well as higher prices.
Which brings me to inflation. Most economists seem to be in agreement that significant inflation will not be seen for a long time but I have noticed one or two commentators recently suggesting that the re-emergence of inflation is not impossible, reminiscent of the 1970s stagflation, and more likely if we are heading into more protectionist waters. It is difficult at this time to predict the impact of the crisis on competition, but we do know what impact protectionist policies will have.
Given that things are not likely to return to normal straightaway it looks likely that governments here and abroad will engage in infrastructure projects to stimulate the economy and employment. This may provide superannuation funds with additional investment opportunities, providing they fit with the early release liquidity landscape.
The biggest long-term question is how governments, both here and overseas, withdraw from their stimulus packages as things return to normal. Possibly even more significant will be what central banks do with their inflated balance sheets. This process was far from complete after the global financial crisis, and the current crisis has muddled this picture even further.
In taking account of these and the other consequences of the crisis we must also consider what role superannuation can play in helping the economy to stabilise and recover. While the description was originally intended to be ironic, Australia has once again proven to be the ‘lucky country’. On this occasion, while it may have been partly due to the accident of geographical isolation, it is also due to other less accidental elements – a decisive and coordinated response from all levels of government, acceptance of those measures by the general public, and first-class public goods and services. One of those public goods is superannuation and the benefits and ballast it brings to economic development, as it delivers on its primary purpose of providing retirement benefits.
Despite the uncertainty ahead, we must try to decipher what it means for investing in the long term and what can be done to support the recovery. All crises, in many respects, share the same characteristics and yet, like Tolstoy’s unhappy families, each crisis is unhappy in its own particular way. The sooner we understand the commonalities of this crisis with previous ones, as well as its unique characteristics, the sooner we can decide how best to deal with its challenges and set things to rights.