Super Funds & Master Trusts In a World of Member Switching, Early Release Schemes and Climate Calamities

As defined contribution (DC) plans have grown and have increasingly become the primary retirement savings vehicle, asset allocators are increasingly interested in incorporating illiquid private assets in these retirement funds to offer participants access to investment portfolios and risk-adjusted returns similar to defined benefit (DB) plans or larger institutional portfolios. In addition, governments are encouraging plans to bolster retirement outcomes and support national economic growth by investing in illiquid private assets such as private equity and infrastructure. At the same time, there is growing prevalence of government actions such as “early access programs” that unexpectedly allow participants to withdraw retirement assets without penalty during bad economic times or climate calamities.We argue that the confluence of these two trends portends heightened portfolio management challenges. Illiquid private assets pose well-known liquidity management complexities: uncertain cash flows, commitment pacing, rebalancing and FX hedging. However, unlike DB plans, a multiemployer retirement plan (e.g., a super fund in Australia or a master trust in the UK) faces additional and novel liquidity management challenges arising from participant actions such as “member switching” or government early access programs.These liquidity challenges affect portfolio liquidity risk that may compel CIOs of these plans to adjust asset allocations today, with consequences for future portfolio performance. We quantify the annual “hidden cost” of these emerging liquidity risks, a cost borne continually by all plan participants. By examining the potential tradeoff between the liberality of early access programs and portfolio performance, we try to help CIOs and regulators make more informed decisions