Graham Hand | Feb 16, 2018 13:28
Originally published by Cuffelinks
The most obvious expectation is that Australian superannuation should have a similar asset allocation as the retirement money in other developed countries. Major asset managers are global, consultants advising big super funds are global businesses, finance executives study the same markets and theories, and investment markets follow a herd mentality. Surprisingly, the differences are stark.
Willis Towers Watson’s not-for-profit initiative, The Thinking Ahead Institute’s ‘Global pension assets study 2018’ of 22 pension markets with assets of USD41 trillion shows Australia has been the fastest grower over the last 20 years, up 12.1% per annum. This is driven by mandated contributions and dominance of defined contribution schemes. Note that although the study refers to ‘pensions’, in Australia’s case, it includes the entire balance in superannuation funds (pre and post retirement).
What’s most notable is how Australia is an outlier in many important ways, including:
Asset allocation and DB/DC split in 2017 by country
Equity markets are usually more volatile and subject to larger drawdowns than bonds, leaving Australian savings more exposed to the vagaries of the market. Countering this worry is that fact that shares offer better long-term returns, and with increasing longevity, pensions need to last 30 to 40 years, not the 10 to 20 years of the past. Australia also has relatively high dividend yields and the benefits of franking credits.
(The Australian data uses the ATO’s reports on asset allocations, which have shortcomings, especially in not recognising SMSF exposure to global equities).
The concern about capital protection is one reason why many MySuper funds are ‘target date’ or ‘lifecycle’ funds, where the defensive or bond allocation increases with age.
There is also an issue with sequencing risk, where the market falls heavily shortly before retirement, when pension balances are at their highest, about to face withdrawals to fund a retirement, and with little ability to top up.
For example, on 18 January 2016, the Chairman of the Future Fund and former Treasurer, Peter Costello, wrote in the Herald-Sun about the risk of investing too much superannuation money into shares, including:
“The compulsory superannuation system has hooked the earnings and savings of millions of Australians into the stock market. I don’t think it was a conscious decision. It started off small and now it has grown big. Stocks are at the riskier end of the investment universe. Government policy has directly hooked the wealth of individual citizens to rises and falls in share prices.
Get The AppJoin the millions of people who stay on top of global financial markets with Investing.com.Download NowOur stock market is still 30% below its level of eight years ago. There’s a lot of lost years for people to make up and a lot of lost wealth. You can see why people prefer to put their voluntary savings in less volatile assets like residential housing. They’re more careful with their money than the Government is.”
Other comments by the Thinking Ahead Institute include:
Graham Hand is Managing Editor of Cuffelinks.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.