And if your fund has liquid assets, that’s hardly a problem. They sell some of those assets, give your money back, and you put it with another manager. But what if your fund has a lot of illiquid assets? By the very nature of illiquidity, they either cannot sell these assets or they cannot sell them quickly without suffering a sharp drop in price. This is why the sales of fire are called “sales of fire”, and not “sales of champagne and chocolate”.

If you take your money out, it could be a significant discount from what it was supposed to be worth. If you get paid full price, the assets of the remaining members are worth less. Either way, someone loses.

A tension inherent in the system

If you think this sounds strangely familiar to you, that’s because it is. This is precisely what happens in an old-fashioned bank run, as in the United States in the 1930s. Bank runs can be solved by compulsory deposit insurance (like the FDIC in the United States). or government guarantees (as in Australia during the 2008 financial crisis).

Likewise, a full government guarantee of all Australian super funds would avoid the “super-execution problem”. But is that where we want our retirement system to go? This would not only fuel massive moral hazard and investment in risky assets, but would also be completely contrary to the government’s rhetoric on promoting competition.

An obvious alternative is that the funds themselves invest only a small amount in illiquid assets, which means that they could more easily cope with redemptions in the event of poor performance.

But this flies in the face of the idea that ordinary Australians should be able to earn higher returns in their super by investing in illiquid assets, let alone the notion of the super industry as a partner in the industry. “nation-building” infrastructure.

There is inherent tension in our retirement system from individuals holding their own accounts and from fund managers investing in illiquid assets.

These are two good things. Individual accounts offer choice, autonomy and a sense of savings for one’s own retirement. Investing in illiquid assets – when you are a long-term investor – offers the prospect of generating higher returns through an “illiquidity premium”.

But individual accounts and investing in illiquid assets don’t mix – just like Perrier and Joseph olive oil are two wonderful things, but they don’t mix. The government’s otherwise sensible reforms to increase competition in the super-sector meet – and exacerbate – this tension.

The real question is how long we have to wait before a poor performing super fund with large investments in illiquid assets finds itself in trouble, ends up on the APRA fail list and investors start running for the door.

It would be a seismic event, shaking confidence in our entire retirement savings system. It should be avoided.