Superannuation assets in Australia have pushed past the $4 trillion mark, blessed with strong inflows and investment performance.
According to APRA quarterly statistics released on Wednesday, the total superannuation assets stood at $4.1 trillion as at 30 September 2024, representing a 13.4 per cent increase compared to September last year.
The majority of the pool was attributed to APRA-regulated super assets which came to $2.8 trillion and saw a 15.2 increase year-on-year. Self-managed super fund assets also surpassed $1 trillion.
The two largest profit-to-member funds – AustralianSuper and Australian Retirement Trust – now collectively control close to one-quarter of APRA-regulated assets.
As funds become bigger investors over the years, their potential to pose system risks in the market is being closely monitored. Earlier this year, the International Monetary Fund and the Reserve Bank of Australia both unprecedentedly voiced concerns that super funds’ investment actions now increasingly have far-reaching implications for the rest of the financial market, due to their large footprint across certain asset classes.
These are valid concerns as the sector’s size gets bigger, said former Lazard Asset Management Asia-Pacific CEO and State Super head of international equities, Rob Prugue. But he believes three other systemic risks supersede them.
The first risk is “the migration from custodial risk into an agency risk”, Prugue, who is now a professorial fellow in the UTS finance department and an independent asset consultant, told Investment Magazine.
“If we look back and refer to the nascent of the superannuation market and the industry funds, their fiduciary responsibility was to act as the custodian on behalf of the members,” he said.
“But over the years…funds began to move away from the pure custodial obligation and began to employ and embrace agency risk as funds sought to capture economies of scale.
“Increasingly, super funds began to look more and more like another financial services provider, albeit one specifically targeting retirement savings. Such a move saw super funds hold agency related risks, over pure principal obligations.”
This shift in focus is manifested in things such as internalising investment capabilities, and more recently opening overseas offices, and Prugue said he is worried some funds and their boards may not be as equipped to oversee this new agency model which some are pivoting into.
‘Populist kneejerk reaction’
The second notable risk is “government policy”, which is that “both sides of the political fence have shown their willingness to move towards as the massive asset pool is too tempting for any politicians looking to offset their policy spend on”, Prugue said.
He referenced the Coalition’s flagship super for housing policy and COVID early release, and Labor government’s many attempts to direct super assets into “nation-building” projects in the last few years.
“Nation-building is what I term ‘tax’,” he said. “Super assets belong to the members, and not government treasurers.”
“You can see the populist kneejerk reaction by governments to find a way to tap into super as a financial means when some of their policies cannot be funded through taxes.”
The final risk is operational risk, which Prugue said is already causing some high-profile member service failures recently.
“In their quest to be a best practice financial services company, it appears as though some boards have turned their full attention towards front office services whilst outsourcing less appealing client service and back-office functions,” he said.
“The irony is that whilst investment function has been internalised, and in some cases sent offshore, some funds have outsourced the more labour and IT intensive back office and client service needs.
“As any fund manager will attest, however incorrect this may be, front office is seen as a revenue source while client admin and operations seen as an expense.”
“The problem with that is…when you take your eye off the member, servicing standards inevitably drop.”
The SG rate will be increased to 12 per cent from July 2025, and it is of little doubt the attention and concerns the super sector receives will only get bigger with more inflow.
None of the new risks funds are dealing with these days were foreseeable two decades ago when the sector had less than $700 billion in assets, but Prugue said the question now is: “how can funds best manage such risks and still retain their custodial obligations?”.
Australia has the world’s sixth-largest pension system, but it is also the one with the fastest growth. The superannuation pot is projected to reach $9 trillion by 2040. The profit-to-member funds are projected to account for $6.5 trillion by that time.
Furthermore in the quarterly statistics, APRA said total contributions also surged 13.1 per cent to reach $191.3 billion in the year to September 2024.
“Of this, employer contributions increased by 11.4 per cent over the year to $140.8 billion. Member contributions increased by 18.1 per cent over the year to $50.5 billion,” the prudential regulator said in a press statement.
Total benefits payment increased 11.4 per cent to $119.9 billion for the year. Lump sum payments rose by 4.9 per cent to $65.1 billion and pension payments jumped by 20.3 per cent to $54.8 billion.
