Australia’s pension system becomes world’s fourth largest

Dan Purves

By

01/02/2017

Australia’s $2.1 trillion superannuation system has edged ahead of the Canadian pension scheme to rank as the world’s fourth-largest pool of retirement savings. Higher allocations to growth assets such as shares, and a preference for cash over bonds, helped buoy local super funds over the past year.

As at December 30, 2016, the Australian super system had US$1.583 trillion ($2.09 trillion) in assets, compared with Canada’s US$1.575 trillion, Willis Towers Watson’s Global Pension Assets Study 2017 showed.

“A stronger growth orientation in Australian funds, relative to Canada, as well as our cash allocation being higher than for bonds, has certainly helped us jump ahead over the past year,” Willis Towers Watson senior investment consultant Paul Newfield said.

No place like home

Of the 22 nations included in the Willis Towers Watson survey, Australia had the second-highest allocation to growth assets (behind the US), the report stated. Both Australia and the US have nearly half (49 per cent) of all pension assets invested in shares.

Australia also continued to display a massive home bias, again surpassed only by the US. More than half (54 per cent) of all equities held within the Australian super system were domestic.

Newfield warns that while this asset allocation has delivered strong results, it might not be the best portfolio construction going forward.

“Having a concentrated dependency on one engine for growth in your portfolio will mean that the pain from a market shock will be more acute [than if] you had a more diversified portfolio,” he said.

Newfield argued the proportion of local shares within Australian super should be reduced to about 33 per cent.

“Australia makes up only about 3 per cent of the world’s equity markets, so having over 50 per cent means you have a massive concentration,” he said.

He added that, anecdotally, many Australian clients of Willis Towers Watson were already re-evaluating the robustness of their portfolios because of concerns over world financial markets, geopolitical risks and interest-rate rises.

Willis Towers Watson’s study examined global institutional pension fund assets in 22 major markets. The combined asset pool of these markets grew to $36.4 trillion at year-end 2016, representing an increase of 4.3 per cent in the 12-month period.

Other findings from the study include:

  • The US continues to be the largest market in terms of pension assets, followed by the UK, Japan and then Australia. Together, these four markets account for more than 81 per cent of total assets.

 

  • The global ratio of total pension assets to GDP was 62 per cent at the end of 2016.

 

  • The Netherlands has the highest ratio of pension assets to GDP (168 per cent), followed by Australia (126 per cent), Switzerland (123 per cent), the US (121 per cent) and the UK (108 per cent). China, counting only its enterprise annuities market, has the lowest ratio (1.2 per cent).

 

  • The average 10-year compound annual growth rate (CAGR) figures (in US dollars) for countries in the study was 3.4 per cent. The CAGR in Australian pension assets was 6.9 per cent, which ranks second highest over the 10-year period. Only Hong Kong, whose pension assets are less than 10 per cent of the Australian total, had a higher growth rate.

 

  • Ten-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP by 33 per cent to reach 168 per cent, followed by Canada (73 per cent to 103 per cent), Australia (104 per cent to 126 per cent) and the US (100 per cent to 121 per cent).

 

  • Equities allocations for the seven largest markets have decreased by 11 percentage points in aggregate during the past 20 years (57 per cent to 46 per cent). Australia remains marginally above this, with a 49 per cent equities allocation.

 

  • Allocations to bonds have also fallen in the seven largest markets during the same period, from 35 per cent in 1997 to 28 per cent in 2016. Australia’s allocation to bonds is half that average, at 14 per cent.