The superannuation sector is a significant and growing source of funding for the rest of the economy. The asset allocation decisions made by the superannuation sector will have significant implications for the flow of funds in the economy.
The size and composition of superannuation assets
As of 31 March 2014, the superannuation sector held $1.8 trillion in assets.89 By comparison, the Australian Securities Exchange (ASX) market capitalisation is roughly $1.6 trillion.90 Financial assets held in the superannuation system were 50 per cent of those of the banking system in 1997 but had grown to 60 per cent by the end of 2013.91
Structural developments in the superannuation system have affected how assets in superannuation funds are allocated. These developments reflect changes to industry composition, particularly the growth of Self-managed Superannuation Funds and Australia’s ageing population.
APRA-regulated funds have a vastly different asset allocation to that of SMSFs. They are more heavily invested in foreign equities and fixed income, while SMSFs have a higher allocation towards domestic equities, property, and cash and deposits (Chart 3.9). The differences in the asset allocations reflect certain features of SMSFs:
- SMSFs have an older membership than APRA-regulated funds, so they are more likely to have a more defensive asset allocation.
- APRA-regulated funds have better access to foreign equity and wholesale fixed income markets, although product developments, such as exchange-traded funds and retail bonds, will make it easier for SMSFs to access such asset classes in the future.
- SMSFs typically cannot take advantage of the pooling benefits available to larger funds.
Chart 3.9: Asset allocation of superannuation funds, 2013
Sources: APRA and ATO.92
Australia’s superannuation assets are expected to continue to grow at high rates for the foreseeable future and exceed the growth of the economy. This growth will be driven by the increase in the Superannuation Guarantee (SG) rate to 12 per cent by 2022, investment returns, and tax concessions on superannuation contributions and earnings. There are a range of projections of future superannuation asset growth (Chart 3.10). Industry Super Australia projects superannuation assets will exceed those of the banking sector by the early 2030s.93 This reinforces the importance of the superannuation sector in funding economic activity.
Chart 3.10: Total superannuation assets: projections
Sources: Industry Super Australia, RiceWarner and Treasury.94
Superannuation assets relative to GDP will eventually peak towards the end of the 2030s, according to one submission, as the number of retirees continues to increase relative to the workforce.95
As the assets in the superannuation system grow relative to the supply of domestic financial assets, superannuation funds may look towards other asset classes and increase their relative allocation of offshore assets. A report prepared by RiceWarner and commissioned by the Actuaries Institute for the Inquiry, argues it is possible that funds will allocate a higher proportion of their assets to overseas investments because of the reduced capacity for the Australian market to absorb those funds. This would have implications for Australia’s balance of payments.
The other major development in the superannuation system is the trend towards a greater share of assets in the retirement phase. Currently, around 30 per cent of assets are held in the retirement phase, but this is expected to increase to more than 40 per cent over the next 30 years.96 RiceWarner argues, among other points:
- The conservatism of retirees as they age is likely to result in a greater proportion of total assets invested defensively, such as in Government and corporate bonds. Older superannuants are also likely to prefer yield over capital appreciation.
- Defensive overlays will increasingly be used to protect members against significant falls in asset values. This will require greater depth in derivative markets and include balance sheet guarantees of banks and insurers, which will require them to expand their capital bases.
- As argued in the Retirement income chapter, there will be increasing interest in products that protect against longevity risk. The increase in demand for products like lifetime annuities will increase the demand for and use of fixed income assets.
The same report also argues that consolidation in the superannuation market will be accompanied by a shift to more illiquid assets as the cash flows for large funds become larger and more predictable. This is discussed further in the Superannuation chapter.
The demand for fixed income products could also stimulate demand for securitised assets, which is an important funding source for smaller lenders. Further, superannuation funds could engage in direct lending to households and businesses in direct competition with the banking sector, which has already occurred in other economies, such as the United Kingdom. This would require superannuation funds to develop credit assessment capabilities and would have implications for how funds might be regulated.
The Inquiry seeks further information on the following area:
What effects will the trends in the size and composition of superannuation have on the broader flow of funds in the economy over the next few decades, including on international capital flows to and from Australia?
89 Australian Prudential Regulation Authority (APRA) 2014, Quarterly Superannuation Performance (interim edition), APRA, Sydney, Page 6.
90 As at the end of April 2014. Australian Securities Exchange (ASX) 2014, Historical market statistics, ASX, Sydney.
91 Australian Bureau of Statistics (ABS) 2014, Australian National Accounts: Financial Accounts, December 2013, cat. no. 5232.0, ABS, Canberra.
92 Australian Taxation Office (ATO) 2013, Self -Managed Super Fund Statistical Report — December 2013, ATO, Canberra. APRA 2013, Annual Superannuation Bulletin, June 2013 (revised 5 February 2014). Asset allocation is for the default investment strategy.
93 Industry Super Australia 2014, First round submission to the Financial System Inquiry, page 117.
94 Treasury 2014, Industry Super Australia 2013, RiceWarner 2014, Ageing and Capital Flows, commissioned by the Actuaries Institute. The projections by Rice Warner include the effects of inflation.
95 RiceWarner 2014, Ageing and Capital Flows, commissioned by the Actuaries Institute, Sydney.
96 RiceWarner 2014, Ageing and Capital Flows, commissioned by the Actuaries Institute, Sydney.