Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 128

Where do Australian funds sit in the global pension industry?

Australia’s largest superannuation and pension funds recorded a compound growth rate of 11% per annum between 2009 and 2014, stronger than the growth rate of funds across the entire world of 6.4%. Yet despite this strong growth, a current challenge for all funds is how to diversify across return opportunities and risks in an environment of increasing asset market and interest rate uncertainty.

These are two of the findings in Towers Watson’s annual report of the top 300 global pension funds, available here. It contains analysis of growth rates, asset allocations, fund types, regions and countries.

Towers Watson said the key drivers behind Australian funds’ growth are:

“The net inflows resulting from the compulsory superannuation guarantee which continue to aid in growing Australia’s retirement savings and perhaps more importantly the fact that Australian superannuation is 84% defined contribution with a larger allocation to equities and other growth-orientated assets than other geographies. This last point, and the strong, positive returns over the five years since the global financial crisis in these growth-oriented assets, have held Australian funds in particularly good stead.”

Other points specific to Australian funds include:

  • Australia had 16 funds in the top 300, as listed in Figure 1, the same as in 2013, with no new entrants in the last year
  • Of these 16 funds, eight improved their ranking compared to 2013, one fund stayed the same and seven funds fell
  • The number of Australian funds in the top 100 increased by one, with UniSuper joining the Future Fund, AustralianSuper, QSuper and First State Super
  • Australia has no funds in the top 20 but two in the top 50, the Future Fund and AustralianSuper.

The Future Fund ranked ninth amongst sovereign pension funds in the survey with US$89 billion in assets. Established during an era of Federal budget surplus, the fund will help provide for the defined benefit entitlements of Government employees. The report notes the decrease globally in defined benefit funds’ share of pension assets from 75% five years ago to 67% in 2014. Defined benefit funds continue to grow but at a slower rate than newer defined contribution funds.

In the next 12 months a number of economic and market factors will impact Australian funds’ rankings and rates of growth relative to international peers. These include:

  • The Australian dollar’s exchange rate against the US dollar, with a falling Australian dollar adversely impacting Australian funds’ rankings
  • Global and Australian interest rate changes impacting rankings of funds with higher bond asset allocations
  • Equity market returns, with rising markets generally improving rankings of Australian funds given their higher equity allocations.

The top 300 global pension funds combined had assets under management (AUM) of US$15 trillion in 2014, representing 43% of the estimated US$36 trillion total global pension asset pool. The total pool has doubled in the last decade, riding out the GFC and subsequent market recovery. North America remains the largest region accounting for 42% of AUM and 49% of funds, with 78% of their AUM in defined benefit funds.

While longer term growth has been strong, the annual growth for the top 300 decreased from 6.2% in 2013 to 3.4% in 2014, through lower global equity market and interest rate returns. Longer term asset mix and currency management will remain important in achieving strong and steady growth, with funds increasingly considering future sources of return value and adjusting their investment strategies accordingly.

Towers Watson says many funds are developing their product range, especially:

“ … in ‘added-value spaces’ to find the extra returns that no longer come from the market. In the process they are increasingly thinking about diversification in the context of all return drivers and adding the necessary governance or outsourcing to ensure success. This is likely to increasingly polarise winners and losers and could reshape the investment industry, completing the shift away from siloed - and indeed expensive - ‘asset class’ thinking and increasingly breaking down the distinction between ‘traditional’ and ‘alternative’ investments.”

While fund assets have doubled over 10 years, questions remain whether the funds management industry has focussed enough on the outcomes for members or reducing costs enough. In the past, most funds emphasised relative investment returns and less the value chain cost containment. This has allowed risk to build up in portfolios, and the cost gains for clients that should have come from such increases in fund size have been modest. There have been some margin reductions, especially in MySuper offers, and with greater scale, this should continue.

 

Iain Middlemiss was Executive Manager Strategy at Colonial First State and Head of Strategy at Superpartners. This article is for general educational purposes only.

 


 

Leave a Comment:

RELATED ARTICLES

Super prospects from Australia’s most powerful CIO

2024/25 super thresholds – key changes and implications

Is your industry super fund too illiquid for its safety?

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

Latest Updates

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.

Economy

New research shows diverging economic impacts of climate change

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.

Retirement

Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.