Illiquid assets, superannuation and retirement risk: structural lessons from recent fund failures

Introduction

Australian superannuation funds have materially increased their exposure to illiquid assets over the past decade, including unlisted infrastructure, private equity, private credit and direct property. This shift has been driven by prolonged monetary accommodation, falling discount rates, the search for yield, and the scale advantages enjoyed by large institutional funds.

While these allocations may be defensible for long‑horizon accumulation members, their growing prominence within retirement and near‑retirement cohorts introduces structural risks that are insufficiently addressed by the current regulatory framework. These risks arise not primarily from trustee misconduct or disclosure failure, but from a misalignment between asset liquidity, valuation practices and the withdrawal behaviour of members who are no longer contributing and cannot recover from early losses.

Recent failures of Australian superannuation funds, including First Guardian and Shield Master Funds, underscore that these risks are not theoretical. They illustrate how liquidity stress, valuation opacity and sequencing risk can crystallise rapidly, despite formal compliance with governance and disclosure obligations.

I illiquid assets, superannuation and the retiree risk profile

Illiquid assets differ fundamentally from listed securities. They are characterised by infrequent pricing, model‑based valuations, limited secondary markets and extended exit horizons. In stable conditions, these characteristics may be tolerable. Under stress, however, they can materially impair a fund’s ability to meet redemptions without crystallising losses.

For retirees and near‑retirees, liquidity is not a secondary portfolio attribute. It is outcome‑determinative. Pension payments, benefit switches and lump‑sum withdrawals occur irrespective of market conditions. Where a portfolio contains a high proportion of illiquid assets, withdrawals are often funded disproportionately from liquid holdings, leaving remaining members increasingly exposed to illiquid and potentially over‑valued assets.

This dynamic creates sequencing risk that is both asymmetric and irreversible. Early losses or forced sales cannot be recovered through future contributions, rendering long‑term average return assumptions largely irrelevant for affected members.

2 valuation opacity, inter‑member equity and withdrawal timing

A defining feature of illiquid assets is valuation lag. Unlike listed securities, which reprice continuously, unlisted assets are typically valued quarterly or less frequently, often relying on discounted cash flow models and subjective assumptions.

During periods of market stress, this lag can result in members exiting at prices that do not reflect current economic reality, effectively transferring loss to remaining members. This raises acute inter‑member equity concerns, particularly where retirement‑phase members withdraw capital at values that later prove unsustainable.

The failures of First Guardian and Shield Master Funds illustrate this risk. In both cases, liquidity stress emerged faster than valuation adjustments, exposing members to delayed price discovery and constrained access to capital. These outcomes occurred despite the existence of formal valuation governance and compliance processes.

3 the limits of governance‑based regulation

Australian superannuation regulation is heavily governance‑based. Trustees are required to act in members’ best financial interests, maintain risk management frameworks, and comply with detailed disclosure and prudential standards. These obligations are necessary, but they are not sufficient to protect retirees from structural risk.

Governance frameworks focus on process rather than outcomes. A trustee may comply fully with statutory and prudential obligations while presiding over a portfolio structure that is inherently fragile in stress conditions. Liquidity mismatch, valuation lag and sequencing risk are not necessarily captured by traditional compliance metrics.

Recent fund failures demonstrate that adherence to governance standards does not guarantee capital preservation or timely access to benefits for retirement‑phase members.

4 asset inflation and asymmetric risk

A decade of declining interest rates and abundant capital has inflated the value of long‑duration real assets. This has compressed future expected returns while increasing sensitivity to changes in discount rates, financing conditions and economic growth assumptions.

For retirees, this creates asymmetric risk. Upside is capped by income requirements and portfolio drawdown, while downside is magnified by forced selling and valuation adjustment. In this context, illiquid assets function less as diversifiers and more as amplifiers of stress.

5 incentives, institutional behaviour and hedging reluctance

Although tools exist to mitigate downside risk, such as dynamic asset allocation, liquidity buffers and conditional hedging, they are rarely employed at scale. Institutional incentives favour peer conformity, benchmark tracking and short‑term relative performance over resilience.

Career risk, governance inertia and reputational considerations discourage trustees from deviating meaningfully from industry norms, even where the deviations may better protect retirees

6 case studies: structural lessons from recent fund failures

The failures of First Guardian and Shield Master Funds should be understood not as isolated anomalies, but as structural case studies. They reveal how liquidity stress can propagate through superannuation portfolios containing significant illiquid exposures, particularly when market conditions deteriorate rapidly.

In both cases, member harm arose from the interaction of: illiquid asset concentration; delayed or model‑based valuations; withdrawal pressure; and the absence of binding, outcome‑focused liquidity constraints.

These failures reinforce the central thesis of this article: that governance compliance alone cannot neutralise structural design risk, particularly for retirement‑phase members.

7 reform pathways

Incremental, targeted reform could materially improve retirement outcomes without prohibiting illiquid investment. The objective is not to constrain trustee discretion, but to better align portfolio structure with the withdrawal realities of retirement-phase members.

Potential regulatory reforms include:

1. Explicit liquidity requirements for retirement optionsAPRA could introduce minimum liquidity thresholds for pension-phase and near‑retirement options, calibrated to realistic stress‑withdrawal scenarios rather than historical averages.

2. Mandatory sequencing‑risk assessment and disclosureTrustees could be required to assess and disclose sequencing risk explicitly, including the impact of early losses on lifetime retirement income rather than headline return metrics.

3. Valuation timing and exit‑price safeguardsRegulators could require more frequent or conditional re‑valuation of illiquid assets during periods of market stress, with safeguards to reduce inter‑member inequity where withdrawals occur at stale prices.

4. Liquidity buffers linked to pension liabilitiesRetirement options could be required to maintain liquidity buffers proportionate to forecast pension payments, not merely overall fund size.

5. Conditional risk‑mitigation frameworksTrustees could be encouraged, or required, to adopt pre‑committed rules‑based mechanisms, such as dynamic de‑risking or hedging, triggered by objective market or liquidity stress indicators.

These reforms would preserve long‑term investment flexibility while materially improving resilience for members who cannot recover from early losses.

Conclusion

Illiquid assets can play a legitimate role in superannuation portfolios. However, their increasing prominence within retirement and near‑retirement cohorts exposes members to structural risks that are insufficiently mitigated by existing governance‑based regulation.

Recent fund failures provide empirical confirmation that liquidity mismatch and valuation opacity can translate rapidly into member harm, notwithstanding formal compliance with trustee duties and prudential standards.

A regulatory framework that remains focused primarily on governance process, rather than withdrawal‑stage outcomes, risks overstating protection for those already in or approaching retirement. Incremental, outcome‑focused reform would materially strengthen confidence in the superannuation system while preserving its long‑term objectives.

Footnotes

1.        Superannuation Industry (Supervision) Act 1993 (Cth).

2.        APRA Prudential Standard SPS 530 (Investment Governance); SPS 515 (Strategic Planning and Member Outcomes).

3.        Australian Securities and Investments Commission, regulatory guidance on valuation practices and liquidity management in managed investment and superannuation vehicles.

4.        Financial Stability Board, Global Monitoring Report on Non‑Bank Financial Intermediation.

5.        OECD, Private Financing and Government Support to Promote Long‑Term Investments.

6.        William F Sharpe et al, ‘Asset Allocation for Retirement Income’ (2007).

7.        Public regulatory and administrator announcements concerning the First Guardian and Shield Master Funds failures.

This article is prepared in accordance with Australian Guide to Legal Citation (4th ed) conventions and is published by The Corporate Compliance Group Pty Ltd for legal, policy and financial professionals.