With the superannuation system projected to reach 200 per cent of GDP in the next 20 years capital will increasingly flow out of the country as super funds seek investment opportunities overseas, according to Deloitte.

From a macroeconomic perspective this will compound the problems brought about by an ageing population, particularly as the old-age support ratio (the number of people of working age per person of pension age) worsens from 4.5 today to 2.3 in 2050.

Neil Brown, partner at Deloitte, said: “We will see more and more funds looking overseas as they diversify. As the per cent of GDP increases, it’s the best place to put money.”

“This, combined with the fact we are going to have less workers per retiree compounds the position Australia is going to be facing. It brings forward the need of what we’ve been talking about, to solve some of these in terms of the adequacy issue,” he said.

The growth of the sector from $2 trillion to $9.5 trillion by 2035 will make it hard for super funds to continue their current domestic allocations, and as a result there will be increasing allocations in emerging market and overseas infrastructure.

In a related point, Ben Facer, partner at Deloitte, said by 2050 Australia will have a substantial challenge in terms of funding the age pension if action is not taken.

“We are either going to have to see the age pension come down or taxes go up, or a combination of both. That is clearly not an attractive proposition to either tax payers or retirees,” Facer said.

While in absolute terms the post-retirement sector of the market is projected to grow to $1.5 trillion by 2035, in relative terms the projections are underwhelming.

“It’s not growing as much as it should,” Facer said. “So we need to encourage more account-based pension and importantly we need to encourage longevity-protected products, such as lifetime annuities, deferred annuities, and pooled-risk longevity protection products as well.”

He suggested, as post-retirement was already heavily incentivised with its tax-free status, that an effective method might be to introduce disincentives for taking a lump sum or possibly an element of compulsion for a portion of the balance to generate retirement income.

Brown and Facer were commenting on findings from Deloitte’s research Dynamics of the Australian superannuation system: the next 20 years 2015–2035 which was released this week.

Another key finding was that out of the projected $1.5 trillion in post-retirement in 2035 almost $1 trillion of this would be in self-managed super funds, with very small growth between the other sectors.


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