Published in partnership with CFA Society Australia.
Australians contribute around $160 billion to superannuation each year and withdraw around $120 billion from the system each year.
It is estimated that in the next 37 years, around the year 2062, the amount of money leaving the system will exceed the amount coming in for the first time.
While the superannuation pool is expected to continue growing beyond 2062-63, that growth will come from investment performance not contributions.
As such, investment professionals will need additional skills and tools to manage this dynamic shift.
The growth and development of Australia’s superannuation system, and the consequences for investment professionals, was the topic of a panel discussion at the recent CFA Society Australia Investment Leaders Forum in Sydney on February 19.
Chaired by Pendal Group distribution director Anthony Serhan, CFA, the panel included ASFA chief executive officer Mary Delahunty, Future Fund Board of Guardians member Dr Deborah Ralston, Aware Super chief investment officer Damian Graham, and chair of The Conexus Institute* advisory board and Minter Ellison strategic adviser Jeremy Cooper.
According to Delahunty, manager skill will be the key to the industry’s ongoing growth, alongside factors like employment rates, wage growth and tax settings.
“I often get asked, is there a cliff and when is the cliff? People want to know the point at which accumulation and decumulation cross over but I don’t think it’s the burning platform that it’s sometimes made out to be,” she said.
“Superannuation assets are still expected to grow for many decades but that growth will be more dependent on the returns that investment professionals like the people in this room can deliver. No pressure.”
Cooper said that just 15 years on from the government’s landmark Super System Review, the industry looked vastly different, highlighting how much can change in a relatively short period.
For Cooper, a former deputy chairman of ASIC and the chair of the 2010 Super System Review, two numbers tell the story of Australia’s super landscape in the past 15 years and provide a glimpse into the future: firstly, $1 trillion, the size of the super system in 2010; and, secondly, $49 billion, the size of Australia’s largest fund at the time, AustralianSuper.
Super system quadrupled
Since then, Australia’s super system has quadrupled to $4 trillion and AustralianSuper has ballooned to $355 billion, based on figures from the Australian Prudential Regulation Authority (APRA) as at September 2024.
“The SG has increased [over that period] but most of that [growth] has been from investment returns, which are, on average, three times contributions in a year,” he said.
Cooper also observed that the “super culture wars” between industry and retail funds had only intensified and this heated competition would shape the industry.
Aware Super’s Graham agreed that competition had never been tougher, evidenced by the significant focus Australian funds placed on advertising and marketing relative to their counterparts around the world.
“We’ve spent some time with pension funds in other countries, including Canadian funds, and they are absolutely shocked by how competitive our system is because in other countries, funds don’t really compete with each other,” he said.
“Their members are ringfenced and I think, over the next 20-30 years, competition will be a real influencing factor.”
For ASFA’s Delahunty, who acknowledged her vested interest in seeing more APRA-regulated funds in the market, the optimal fund size is a contentious issue.
“There are some services that need to be delivered in a way that there is no economy of scale, so there is a tipping point at which a fund, depending on number of members and FUM, can’t operate in Australia anymore,” she said.
“There is a bit of contention around exactly what that number is and we’d like to make sure that it is low enough to foster a strong, innovative system but not at the cost of members losing out.”
APRA-regulated funds to the side, Dr Ralston pointed out that self-managed superannuation funds (SMSFs), of which there are over 625,600 representing more than 1.15 million members and over $1 trillion of assets, remained an important part of the market and one poised for further growth, as demand for advice increased and technology made it easier for investors to access products and services.
“One of the main reasons that people set up an SMSF is because they want control over how their money is invested,” she said.
“That’s part of human nature and I can’t see human nature changing.”
Graham said technology had the power to significantly disrupt the sector and accelerate the mass personalisation of outcomes.
“The mass customisation [of super] seems like a logical progression but it doesn’t guarantee the disaggregation of collective vehicles. It’ll come down to which providers can deliver customised outcomes in the future,” he said.
Customisation and competition
Touching on both customisation and competition, Dr Ralston suggested that retail funds had the edge on industry funds in terms of access to capital for growth and that after a difficult period the retail sector appeared to be making a “come back”.
“The proportion of the market that each sector represents has changed over time, and industry funds have done very well,” she said.
“They now account for about half of assets and around 34 per cent of member accounts, and one of the reasons that they’ve done so well is consolidation, which has been really important to deliver the economies of scale they need to do their job well given they don’t have capital because the money they have is members’ money.”
That said, some of the success that industry funds have enjoyed in recent years has come at the expense of retail funds, which experienced significant brand damage and outflows, as a result of the misconduct and poor practices uncovered by the 2018 Financial Services Royal Commission.
“Retail funds, particularly those providing advice, had a really tough time through that period and that created a lot of risk aversion across the industry, which is starting to dissipate,” Dr Ralston said.
“The numbers show that [the retail sector] is growing strongly and they certainly have far better access to capital, so I think that part of the industry will come back strongly.”
According to Dr Ralston, financial advisers will play a critical role in that comeback, as Australia’s rapidly ageing baby boomers seek advice to understand their financial position and guide them through retirement.
Dr Ralston, a member of the government’s 2019 Retirement Income Review, said funds should be able to give guidance to members on a range of issues including how much money they may need in retirement and whether they should pay off debt.
“[The industry] has had tremendous difficulty defining exactly what advice is and its aversion to giving guidance has possibly set us back,” she said.
“Fortunately, technology is emerging that will be very helpful in assisting funds to understand, communicate and engage with members. This is really important and will also help with personalizing outcomes but there is a bit of work to do on the retirement side.”
While Australia had been a pioneer in superannuation and building retirement savings, progress has been slow in retirement incomes, Cooper said, citing obstacles including a broken advice system, poor member data, and a lack of genuine passion from industry leaders.
“Advice is hard because funds don’t know how far they can go in terms of guidance but it’s not impossible to do,” he said.
“There’s also a lack of passion. Retirement always features in the top three issues for super funds but it’s never number one. There’s always something ahead of it.”
Asked by Serhan to sum up by singling out the biggest expected change to the industry in the next 30-40 years, Dr Ralston said better member engagement through to retirement, Graham said mass customisation of outcomes, Delahunty predicted the end of the politicization of super, and Cooper said far fewer, more powerful funds plus something no one will see coming.
“I don’t know what it will be but it’s what I call the kale and quinoa effect. Twenty years ago, no one was eating that stuff. Similarly, it’ll be something new that just pops up and everyone will say, where did that come from?”
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
