In its submission to the Financial System Inquiry’s final report, ASFA stated it believes that in most cases, leverage is inconsistent with the objectives of superannuation.
ASFA is concerned that in borrowing to invest in super assets, the consumer is reaping a tax benefit and it is not clear the extent to which this is matched by an equivalent reduction in future social security liabilities for the government.
In addition, ASFA noted that in an unleveraged portfolio, investors can experience significant losses but, provided they do not need the money, they are able to “ride out the volatility”.
However, this option may disappear in a leveraged portfolio since an investor may be forced to realise some of, or even their entire portfolio to meet interest repayments or margin calls.
“It is important that the superannuation system does not allow significant exposure to particular risks that may work against the overall stability of the financial system,” the submission stated.
“If a sudden market adjustment were to occur, in an environment where asset prices are high and interest rates are low, increased leverage in superannuation has the potential to disrupt the economy. An example, relevant today, would be a correction in residential property prices alongside an increase in interest rates.”
ASFA also said there may be liquidity concerns that result from super funds leveraging over assets such as property.
“Where a fund, most likely an SMSF, has borrowed to acquire a property, where the property is untenanted for a period of time, or rental payments are late or reduced, this can create significant issues with respect to cash flow and servicing the loan,” the submission stated.
“This is exacerbated if the fund is in the drawdown phase and not in receipt of contributions.”