Home / Analysis / Aussie equities a mainstay as big super gets bigger

By 2041, Australia’s super funds will swell to enormous size. How they invest our retirement savings will become an even trickier prospect.

Over the next 20 years, the superannuation system will grow to a colossal size – an estimated $9.2 trillion, or 206 per cent of its current size, according to a report from Deloitte’s Actuarial Consulting group, headed up by a number of former Rice Warner staff, including Andrew Boal (picture at top).

But despite their enormous size – and aspirations to be true competitors in global markets – super funds will continue to play largely in their own backyard. Deloitte expects that the proportion of the ASX market capitalisation represented by superannuation funds will increase to more than 42 per cent by 2041 – up from 32 per cent today.

Australian equities will remain an important mainstay of the industry for several reasons: the dividend imputation system, which mean funds “effectively receive refunds of excess franking credits on franked dividends”; the familiarity of retail investors with the shares of Australian companies due to past privatisations and demutualisations; and interest rates,

“Superannuation funds would own a large and increasing proportion of the ASX holdings over time if they continue to hold a similar allocation of assets to Australian shares as they hold now,” the report says. “However, a key issue will be whether there will be enough capacity in the ASX to support this level of demand from superannuation funds, and any consequential impacts on assessment against APRA’s super product heatmaps.”

Within that are a number of considerations. Funds will of course be forced to look offshore in order to diversify their investments, as some are already doing by establishing overseas investment teams. How they invest in those equities – passive or active – is also in question, as is whether they will begin to seek board representation on the public companies in which they hold their most significant investments (something that could make the ongoing common ownership debate even more vexed).

“We have also seen superannuation funds enter into joint ventures and consortiums to make large acquisitions and investments,” the report says. “For example, a consortium of super funds (plus several Australian and international investment and infrastructure funds) has made a bid this year to acquire Sydney Airport, which has been unanimously supported by the board and is now subject to shareholder and regulator approval. This will be one of the largest corporate takeovers in Australian history if it proceeds.”

One important battleground for the industry over the next 20 years – and which will likely be most heated in the next ten – is the retirement space. The Morrison Government’s retirement income covenant has put the onus on funds to create their own retirement products to assist members in the drawdown phase, and Deloitte anticipates that industry funds will be one of the winners.

“Together with SMSFs, industry funds will become the dominant sector in the post-retirement space. Industry funds will benefit from the ‘stapling’ of superannuation accounts, and individuals being more likely to be industry fund members at the point of retirement and therefore continuing to remain in that fund post-retirement.”

And while SMSFs remain the “preferred vehicle” for wealthy investors due to their tax benefits and the provision of additional control, they are likely to lose market share over the next two decades “due to their older demographic transitioning to retirement and commencing material drawdowns of their assets.” Industry funds are also creating a viable alternative to SMSFs for their younger members by allowing them to directly invest in the equities of ASX-listed companies, as well as in ETFs and managed funds, though there is a more “restricted range” of permitted direct investments.