Millions. Billions. Trillions — the dollars held by Australian workers in superannuation can make you dizzy.
“There’s $4.2 trillion of members’ money under management in superannuation,” says Mary Delahunty, chief executive of peak body the Association of Superannuation Funds of Australia (ASFA).
‘That makes Australia one of the top investors in the world.”
ASFA’s new study suggests compulsory super has boosted household savings by more than $500 billion and is reducing the government’s need to pay for the age pension — the main income support for older people.
It means we’re spending vastly less than many other countries to give people a better retirement.
Gross domestic product (GDP) is the value of all the goods and services created in a year.
Australia currently spends around 2.3 per cent of our GDP on the aged pension, but that figure is falling.
“It’ll go down to around 2 per cent by 2060,” says Ms Delahunty.
“This is against a backdrop of an aging population with increased health needs.
“It’s bucking the trend internationally. Most OECD countries are [spending] 9 per cent and growing, and they will be above 10 per cent by 2060.“
Mary Delahunty says superannuation has transformed the lives of workers. (ABC News: Simon Tucci)
The only country spending a smaller portion of GDP on the age pension currently is South Korea (1.3 per cent) but by 2060, that’s predicted to be 7.5 per cent.
“We are the only ones going in the other direction … and it’s the compulsory super system that has delivered that to every taxpayer.”
Sam Sicilia, chief investment officer at super fund HostPlus, said the primary purpose of super is to provide people with “dignity in retirement”, but noted another intention was to reduce the reliance on the government age pension.
“What you’ll find is, as account balances grow over time, in the future there will be less relying on government pension, and therefore it will reduce the burden on the taxpayer.”
And there is only one size for super: bigger.
From July this year, 12 per cent of the value of all the pay packets in Australia will go into the superannuation system annually, locked up until people turn 65 and can access it.
Megamoney as funds look globally to invest
The amount of money in super is hard to comprehend — total superannuation assets were $4.1 trillion at the end of the September 2024 quarter, according to ASFA.
Cath Bowtell, chair of IFM Investors, puts it simply: “That’s just a lot of money.”
IFM Investors represents so-called “industry”, or profit-to-member, funds like AustralianSuper, HESTA and Rest, funds including AMP and Zurich that manage people’s accounts for profit, as well as institution-based corporate funds such as Qantas Superannuation Plan and Telstra Super.
It looks after $230 billion in assets, from a 250-kilometre toll road in Indiana in the US, to container port terminals in Vancouver (Canada) and Adelaide, Perth and Darwin airports.
“There’s $US2 billion ($3.2b) flowing into the [super] system every week that we have to invest.
“That’s just a lot of money that has to be put to work for Australian working people and we have to scour the world, now.”
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The country’s largest fund, AustralianSuper, has more than 40 staff in New York.
Last year, Australian Retirement Trust opened an outpost in London, while Aware Super already had an office in the UK’s financial hub.
“The size of the system [currently] is 1.5 times the size of the Australian economy, growing to two times the size of the Australian economy in the foreseeable future,” Ms Bowtell notes.
Sam Sicilia agrees most Australians wouldn’t understand the epic scale our system has grown to.
“We currently have the fourth-largest pension pool of capital in the world,” he says, with only the US, the United Kingdom and Canada ahead.
“The Australian system is mandatory, and it will surpass the UK and Canada within the next five to seven years, so we will end up being the second-largest pool of capital in the world.“
We’ll have the silver medal for retirement savings, with just approximately 8 per cent of the population of the United States.
Big funds, not even taking into account more than 621,000 self-managed super funds holding more than $1 trillion, currently hold 21 per cent of the shares trading on the Australian stock exchange.
The funds could easily afford all Australian stocks, but instead spread their risk across different financial instruments and assets like land, office towers and toll roads.
That scale is raising big questions about our financial system.
Super’s ability to amplify and dampen shocks
In its recent Financial Stability Review — a bird’s-eye look at the resilience and stability of our financial system — the Reserve Bank of Australia called out the scale of super.
“The superannuation sector’s significant growth, rising connectedness with banks and increasing footprint in financial markets creates new risks, including the ability to amplify shocks.“
As the sector has grown, its connections with the banking system have increased: superannuation funds directly hold nearly one-third of bank short-term debt securities and over one-quarter of equity issued by domestic banks.
Australian super funds provide a huge amount of the funding for domestic banks. The RBA says that’s both a source of stability and a potential risk. (Supplied: ASFA)
“Consequently, superannuation funds have the potential to amplify shocks in the financial system,” the report says.
This could happen if the investment decisions of funds were to become “more correlated or concentrated in times of generalised market stress”.
This did happen at the start of the COVID-19 pandemic, when funds increased their sale of banks’ “debt securities” back to those same banks, which added to the pressure they were under to find funding. It made finding cash more expensive.
But the flip side is that a key tenet of superannuation is the concept of “preservation” of money for retirement.
Because people can’t access their super until they turn 65, even when shocking things happen — for example, the pandemic — there isn’t a surge of people trying to remove their money from their super accounts, because they’re not allowed to.
That means superannuation funds are still searching for investments when others flee.
“As long-term investors, superannuation funds can support financial stability by deploying capital in a counter-cyclical manner, including when volatility spikes and asset prices fall,” the report adds.
Because super funds are investing for a long horizon and most customers can’t pull their money, market dips are an opportunity to buy assets at a cheap rate rather than a disaster that sees customers lining up to withdraw their cash at a loss.
The sector is also structured in a way that “help[s] limit the build-up of systemic risks”, including by having variable returns, it notes.
Super a ‘patient provider of capital’, industry says
The super industry, predictably, doesn’t see its size as a weakness.
ASFA’s Ms Delahunty says the “interconnectedness of super with the banking system and other financial systems around the world” is something the sector has been watching closely — and is one of the key reasons funds diversified into investing in different things in different parts of the world.
“We invest in Australia and increasingly, invest internationally, and we work pretty closely with the central bank on what some of those risks might be,” she says.
“On the flip side of that stability is this patient provider of capital that actually can invest counter-cyclically as well. So it is an argument with two sides of a coin, I suppose.”
HostPlus’s Sam Sicilia says Australia’s “four very strong, very stable banks” served the nation well during the pandemic and added to financial stability. But they weren’t alone.
“The superannuation funds had capital, and now have arguably more capital to provide a backstop in case there is a financial event,” he told ABC News at the Asia Pacific Financial and Innovation Symposium in Melbourne.
“We can fund companies, we can fund investments. We could fund banks to help them through liquidity needs in the event of a crisis … a large pool of capital provides stability to the financial system.“
Super funds searching for liquidity
Deutsche Bank macro strategist Lachlan Dynan says the scale of Australian superannuation investments means that, in many ways, they’ve “outgrown” the options here.
Lachlan Dynan says super has at times outpaced GDP growth. (ABC News: Daniel Irvine)
That’s because “what they care about is not just returns, but liquidity as well”, meaning that they need to see money coming in from their investments, but they also want the ability to get money out if needed.
“As they become a bigger chunk of markets, the potential concern is that they want to access more liquidity overseas.
“Accessing greater and more diverse investment opportunities overseas is probably also partly a motivator of that.”
He can understand the Reserve Bank’s concern about the impact of super in a potential financial shock.
“What the RBA and some others have been focused on is the risk that, in a global shock, the funds could come under pressure from their foreign exchange hedge [investments],” Mr Dynan says, referring to a situation where funds have to deliver cash to avoid a “margin call” or potential losses.
“There might be a concern that in order to meet that cash, they potentially need to sell some Australian dollar assets.
“Given they own such large chunks of some key markets, then the chance for kind of an exacerbating force on those markets is there from simply the presence of super in those markets,” he explains.
That is tempered, he notes, by a recent example — when, during the pandemic, people were given “early access” to their superannuation.
It’s been estimated that 3 million Australians withdrew around $38 billion from their accounts under the scheme.
‘Super for houses’ mooted by Coalition in election fight
If elected, the Coalition says it would write laws that would allow first home buyers to use up to 40 per cent of their superannuation balance towards a home.
This would help people enter the housing market by allowing them to use up to $50,000.
To be able to withdraw that amount, they would require a super balance of $125,000 — most people aged 40 and under don’t have half that much, according to the Australian Tax Office.
The Coalition did not answer questions about the proposal, but said in a statement that using super to buy a house was better than being a lifelong renter:
“Under a Coalition government, we are recommitting to allow first home buyers to access a portion of their own superannuation to help with the deposit hurdle.
“This means Australians can buy their first home sooner by slashing the time taken to save a deposit by three years, on average.
“Reports including the Intergenerational Report show owning your own home historically plays an important role in supporting retirement outcomes for Australians.“
The Labor Party was asked to comment on the proposal but did not respond by deadline.
Previous discussion of the idea — which was taken to the 2022 election by the Coalition — has noted that it would increase demand for housing and be likely to boost prices.
