When Mercer released its global pension index in October, there was a vigorous discussion about the fact that Australia was “marked down” as a result of having a higher percentage of its superannuation assets allocated to growth.
In fact, the nation’s growth assets were rated at between 71 and 80 per cent – the highest of the 18 countries surveyed. Next was runner-up the Netherlands, ranked second ahead of Australia’s third, then Denmark with the gold star and between 11 and 20 per cent of its pension funds in growth assets.
How long can the Australian system last?
Both Simon Eagleton and David Knox from Mercer make the point that they do not regard this as a reason to be concerned about the sustainability of the Australian system.
Neverthless, the report – written by Knox – comments that:
For countries with a ‘growth’ asset allocation higher than 60 per cent, as is the case for Australia, a maximum score was not achieved. The reason is that such an allocation provides a high level of exposure to volatile assets, particularly in a country which is predominantly DC, where members bear all the investment risk. A broader range of assets, including corporate bonds and credit, is likely to provide a better long-term outcome for members.
Former Treasury secretary, Dr Ken Henry, has also weighed in on this issue this year, with his most recent speech to the Australian Securitisation Forum including the comment that institutions had to shake off their “deep demand bias” to equities because of the timing problems that market volatility could cause for people approaching retirement.
He repeated comments he made in March about the dangers of sequencing risk, which can cause a dramatic drop in the income stream for retirees who go into the pension phase shortly after a sharp drop in sharemarkets, such as the one in the wake of the global financial crisis.
Henry said that if a crash occurred in the last year of an investor’s 20-year saving period rather than in the first year, the overall annual return they could look forward to would drop from a theoretical 9.51 per cent in the first-year crash example, to a mere 3.5 per cent. This was even if equity markets had otherwise behaved in an identical fashion.
“Every year, over a number of years, the arithmetic changes in a profound way,” he said.
Henry said Australian investors had a comparatively low exposure to less volatile fixed-income investments – by international standards – at about 10 per cent compared with about 50 per cent in OECD nations.
His main concern is that 65 per cent of Australian savers in major funds are in balanced portfolios holding 60 to 75 per cent growth assets, mainly shares.
High on volatile growth
AXA Framington investment manager, Mark Tinker, has also been a strong critic of the Australian super’s allocation to equities. He quotes Towers Watson figures estimating that around 50 per cent of Australia’s retirement savings pool is in “volatile” equities, higher than the global average of 41 per cent.
On a recent visit to Australia, the London-based Tinker espoused his belief that defensive assets were more appropriate in the current market.
He conducted a snap poll of Australian fund managers and claimed that half of them had no intention of changing their allocations in the next year. The rest were split 60/40, with 60 per cent intending to scale back that equities exposure.
It’s not necessarily a view that is widely shared. Some Australian trustees and CIOs – such as Media Super chairman, Gerard Noonan – believe that the current allocations of Australian funds are entirely appropriate to deliver growth over inflation.
As Noonan says, there’s no point in over-allocating to fixed income if it can’t beat inflation and says he thinks there is an argument out there to “spook” funds that are actually doing quite well.
And even Mercer’s Knox, who wrote the Melbourne Mercer Global Index report, is relaxed about Australia’s high level of growth assets.
The question remains, then, as to why Australia was marked down.