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Superannuation funds should be long-term lenders

The view (strongly expressed in the AFR Superannuation Lending Roundtable for example) that super funds should do more long-term lending has much merit, despite bank objections. There is, in fact, a fundamental mismatch in terms of the channels by which household savings flow to those wanting finance for investments in real assets.

The Australian financial system has still not caught up with the realignment of household savings into long-term investments brought about by the growth of superannuation.

A fundamental mismatch

Essentially, and at only minor risk of over-simplification, the mismatch is as follows. Banks provide liquid (short-term) facilities for savers but tend to make longer-term loans.

Super funds provide long-term saving facilities, but tend to invest primarily in liquid and marketable investments, such as equities and debt securities tradeable in markets. The figure illustrates this mismatch.

Bank profits benefit from investing in longer-term loans because of the liquidity premium built into the expected return on such loans, but they need to hold some liquid assets to manage the resulting liquidity risk mismatch. Super funds, by investing predominantly in marketable (liquid) securities rather than longer term less-liquid loans, forgo the available liquidity premium to a cost to their members.

It makes sense to have long-term savings directed more to financing long-term investments and short-term savings (which involve liquidity risk for the institutions accepting them) invested in shorter-term investments. Otherwise, the growing stock of long-term savings needs to be diverted to banks for their credit creation via super funds on-lending to banks, involving, at least, a cost of double-handling.

Traditional roles

Of course, there is more to it than just a realignment of investment patterns. Banks are generally seen as creators of new financial assets in the form of loans (or facilitating companies to access debt and equity markets) and use their expertise in credit risk assessment to do this (hopefully) well. Super funds are traditionally seen as investors in already existing assets (such as securities traded on financial exchanges).

Yes, eventually the investments made by super funds will provide the ultimate funding of securities created by banks (bonds, securitisations, equities, etc.). But might it be better to have the ultimate funding aligned with the initial funding via the super funds being the creators of new financial assets?

More generally, with the growth of illiquid (super) savings, is there as much need for the risky liquidity creation traditionally undertaken by banks and the high liquidity premium cost built into longer-term funding?

The banks will argue that credit risk assessment and management of illiquid loans is a skilled task, involving expertise which super funds do not currently have. That may be so, but three counter-arguments are relevant.

First, individuals with, and systems providing, credit risk expertise and capabilities, are transferable resources which can be ‘poached’ or purchased.

Second, it would be possible for super funds to outsource the credit risk task to a trusted third party who has sufficient ‘skin in the game’ to ensure their objectives are aligned with the super fund.

Third, the explosion in data availability due to the digital revolution (and open banking) is reducing the value of the traditional customer relationship role in credit risk assessment.

The banks also have a strong self-interest rationale for their stance. More competition in long-term lending can be expected to impact adversely on bank profits. And if they are undertaking less liquidity creation and holding more short-term assets, profits will be affected by less liquidity premium rewards.

Of course, super funds have already moved into the creation of new long-term financial assets, through such investments as funding new infrastructure projects. But there is scope for more long-term financial asset creation from a lending role.

There are clearly risks involved which warrant attention. There is also the problem of valuing illiquid assets and the potential for mis-valuation of non-traded assets to adversely affect the ability of APRA to identify underperforming funds. But discussion of a lending role for super funds is warranted.


Kevin Davis is Emeritus Professor of Finance at The University of Melbourne. Kevin’s free e-text reference book 'Bank and Financial Institution Management in Australia' is available on his website. Kevin was also a member of the Financial Systems Inquiry ('The Murray Report') in 2014. 


Mark Hayden
September 19, 2022

That is an excellent proposal, Keith. That diagram says it all. Whilst simplistic, it is hard for anyone to argue against the fact that matching the time-frames for assets and liabilities can be a winner for both borrowers and savers. Your "three counter-arguments" provide a path forward. I hope that many "borrowers and savers" (read "young home-owners and retirees") can provide support to this proposal. It is a win-win.

September 14, 2022

The super funds lending credit (either short or long term) will be an a slippery slope. In a nanosecond, charlatans will be enticing them with complex instruments offering seemingly enhanced yields and much disguised increased risks. They should stick to their knitting, or get banking licenses. Otherwise we, the taxpayers, will be having to bail them out.

Carlo Bongarzoni
September 14, 2022

Mr Davis's article is a bingo. Australia's massive superfund savings or at least a %ge should certainly be invested in Australian infrastructure and the like to increase the speed and quantity required for our future and as a safe dependable income source

September 14, 2022

One wonders why big super companies haven't started their own mortgage companies. The big banks have proven it is profitable.

September 14, 2022

Lots of companies make profits Michael,that's why super funds own most of the shares in them.They buy small companies ,EG, they took me out of Sydney airport recently.

CBA annual report arrived today,full time equivalent employees approx 49,000.The super fund would employ all of these people.?.

The bank is highly leveraged and operates on a small margin.From memory around 1% of gross assets,less for the last 5 years.

Take in $100 billion from customers and pay them interest.Lend it out to people at a higher interest rate and the difference is gross profit,NIM.A quick glance and NIM is 1.9%,pay wages,rent,super,etc and this leaves 0.9%.

Coles and Woolworths reports should come shortly,they operate on higher profit margins than a bank.They would probably employ perhaps 200,000 people directly.Should the super funds open supermarkets and logistics companies?.

I think it works fine as it is.I let somebody else do the work and get my share of the profits through dividends,the super funds do the same.
For CBA then HSBC funds own 22.27% of the shares. J.P Morgan own 14.29%.,then Blackrock,State street and Vanguard with 6,5and 5%..

Very few people own shares directly in any of the companies I own.CBA is a large company,the breakdown of shareholders tells you that 177,000 people own between 1000 and 5000 shares. This is a widely held company.To get 1000 shares in CBA you would need to buy around 350 now and use the DRP for say 18 to 20 years.I think this is within the reach of most people.They are not going to do it.
Those top two shareholders are the top two in probably every company I own.

Jeff Oughton
September 15, 2022

Another option is to dis-intermediate non-banks and for super funds to directly offer pension loans (reverse mortgages) secured against the homes of older Australians unlocking their main source of private savings and significantly boosting their government aged pensions/retirement incomes and well being - For the superfund, AAA highly collateralised long term loans with limited if any credit risk and at a better margin than a bank deposit . Oh no - they'd need to provide some general advice - over the phone or via a chat bot - and if need be - in a crisis have access to public liquidity - just like a bank !

January 24, 2023

The headline rate we see of banks profit results looks large but when assessed from a step back it is not brilliant.

Return to Super members in real terms would not be that good and could rightly be argued that then not in the best interests of members to be invested in the mortgage markets.

We have a similar issue with Superfunds investing in infrastructure and getting a clip annually for the investment.

Yes they are getting a return, but it may not be in the best interest of the members. It also creates liquidity issues by having large amounts of money held in illiquid assets with so many Baby Boomers and GenX coming into retirement


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