Dynamics of the Australian Superannuation System

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Dynamics of the Australian Superannuation System

The next 20 years: Deloitte Analysis

  • Total superannuation assets will rise from $2.7 trillion to $10.2 trillion by 2038
  • Australia’s ‘old age dependency’ ratio is projected to worsen over the next 20 years changing the ratio of retirees for each working Australian from 1:4 to 1:2.4
  • Current super funds’ investment in Australian shares is about 35% of the ASX total market cap - if funds continue to hold the same proportional asset allocations, this will rise to more than 60% in 2038 and so dominate ASX holdings.

27 November 2019: Despite ongoing volatility in investment markets, and historically low inflation and cash rates, the Australian superannuation industry has continued to grow. Total superannuation assets rose from $2 trillion at 30 June 2015, to $2.7 trillion at 30 June 2018. In its latest modelling, Deloitte projects Australia’s total superannuation assets will continue to increase over the next 20 years to $10.2 trillion by 2038.

Diane Somerville, Principal, Deloitte Actuaries & Consultants and author of The Dynamics of the Australian Superannuation System - the next 20 years to 2038, said: “These projections reflect the legislated increases in the Superannuation Guarantee from 9.5% to 12% by July 2025, with the next increase to 10%, scheduled to occur from 1 July 2021.”

Somerville added that an important caveat to the projected 275% growth in total superannuation assets to $10.2 trillion is that the current low interest rate environment, that has continued to prevail both in Australia and globally for more than five years, is likely to remain the ‘new normal’.

She said: “Despite this low interest rate environment, super fund returns continue to be strong. In spite of short-term volatility, funds have consistently earned robust returns over the medium term, ensuring average balances at retirement have increased. Add to this the fact that many members have received superannuation contributions for a significant proportion of their working lives.”

The Deloitte report shows that post-retirement assets are also expected to grow despite members beginning to draw down their accumulated superannuation savings over time.

Russell Mason, Deloitte Superannuation Lead Partner said: “However, given that there are no maximum constraints on the pace of members drawing down their benefits in retirement, if retirees are forced to draw down their retirement savings more quickly than expected in a low return environment, the projected asset growth to more than $10 trillion by 2038 would slow.

“Commensurately, the call on the government for the aged pension would increase. To that end we anticipate this will be an important matter to be considered by the Government’s recently announced Retirement Income System Review.”

Somerville said: “Irrespective of whether improvements in average life expectancies continue, or slow down, the ‘old age dependency’ ratio in Australia is projected to worsen over the next 20 years and on to 2050, meaning there will be a greater number of retirees for each working Australian. This means that managing the issues of adequacy and longevity continue to be important for individuals and Australia as a whole. The two levers with the greatest effect on ultimate superannuation balance at retirement are contribution rates and investment strategy. And they are in a member’s control. Therefore, the earlier a member gets appropriate advice on making the most of their superannuation, the better the impact on their final retirement outcome.

“Retirees will need to ensure they don’t draw down too quickly and outlive their savings, and at the same time don’t draw down too slowly and retain a significant proportion of their superannuation when they do pass away, meaning they will have lived more frugally than necessary.”

The report points out that funds are continuing to offer limited advice and robo-advice to their membership at growing rates. And that superannuation funds and others will have to create retirement products suitable for differing groups of retirees at different life stages in the coming years.

Mason said: “This provides real opportunities as well as challenges for the industry to innovate and develop products and solutions which will enable retirees to manage the retirement risks of longevity and investment risk, but which still retain simplicity so that members understand them.”

One solution among a number in the concluding section of the report, is to encourage older people to work longer, where it is practical, and provide relevant work opportunities and retraining to make this achievable.

Market dynamics

In describing the current market dynamics, characterised as they are by constant change, consolidation, compliance and the ever-increasing need to ensure that the customer is central to all fund activities, Mason explained: “This means that superannuation funds continue to face a market with higher expectations from their investment activities, which in turn leads to greater scrutiny of comparative returns and performance metrics relative to peers.

“To manage this, some funds have moved key parts of their investment management activities in-house and in particular strategized whether to focus on alpha returns in certain asset classes."

Mason said: “As larger funds increase in size, they have also sought more sizeable investment transactions such as those through private equity consortiums.”

The report points out that the impact of a $10.2 trillion asset allocation on the Australian share market could be considerable and dominate the Australian Stock Exchange (ASX) given there is a high percentage of assets currently invested in equities, of which a significant proportion are domestic (Australian) equities.

Mason said: “Currently the total investment by superannuation funds in Australian shares comprises around 35% of the total market capitalisation of the ASX. If they retain the same percentage allocation, this will increase to more than 60% by 2038 – almost double the current allocation – and so dominate the ASX’s holdings. A key issue will be whether there will be enough capacity in the ASX to support this level of demand from superannuation funds, given that there are also individuals and companies seeking to invest non-superannuation monies.”

See the report for more detail on the components of the market and superannuation assets by market segment and the projected movement of total assets in each segment from 2018 to 2038.

Media contact

Louise Denver
Director, Corporate Affairs & Communications, Deloitte
M: +61 414 889 857

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