More growth, and growing pains, for super system

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The size of the total super pie should hit $10.2 trillion within 20 years – by 2038 – compared with $2.7 trillion as at June 2018, according to modelling by consulting and actuarial firm Deloitte. In its annual review of the state of the super industry, Deloitte says that the rapid growth should continue despite a low interest rate environment and ongoing market volatility.

The projections assume the legislated increase in the SG to 12 per cent, starting with the lift from 9.5 per cent to 10 per cent from July 1, 2021, and continued low rates and inflation as “the new normal”.

Diane Somerville, a principal of Deloitte Actuaries & Consultants, and lead author of ‘The Dynamics of the Australian Superannuation System – the next 20 years to 2038’, said last week: “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 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’s 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 ‘Retirement Income System Review’.”

Irrespective of whether improvements in average life expectancies continue 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 report says. The two levers with the greatest effect on ultimate super balance at retirement are contribution rates and investment strategy. And they are, to a certain extent, within a member’s control. The the earlier a member gets appropriate advice on making the most of their superannuation, the better the impact on their final retirement outcome.

Mason, who has had a long history advising profit-for-member super funds, said there were “real opportunities as well as challenges” for the industry to innovate and develop products and solutions to enable retirees to manage the retirement risks of longevity and investment risk, but which still retained sufficient simplicity for members to understand them.

One solution, as has been generally discussed, was to encourage older people to work longer, where practical, and provide relevant work opportunities and retraining to make this achievable.

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

Interestingly, the Deloitte report predicts that the growth could have a major impact on the structure of the Australian share market. Currently, the total investment by super funds in Aussie shares is about 35 per cent of the total market capitalisation. If funds retain the same percentage allocation, this will increase to more than 60 per cent 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 super funds, given that there are also individuals and companies seeking to invest non-superannuation money.

– G.B.

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