Australian super funds controversial but a global success
Over the past year, Australian super funds were among the best performing in the world.
Superannuation has been in the news for all of the wrong reasons recently but there is one thing we should all be thankful for about our form of retirement savings.
In the past year, Australian superannuation funds were among the best performing in the world for protecting and growing wealth during a time of extreme market stress.
Perhaps, surprisingly, one of the top reasons Australian super funds did so well is that they are more adventurous than most around the world – having much higher allocations to shares and lower allocations to government bonds than most of their offshore cousins.
Global assets fall almost 17%
Global pension assets overall had a terrible year in 2022 – suffering the biggest drop since the GFC of 16.7% to $47 trillion as the unthinkable happened. There were also simultaneous corrections in share and the bond markets.
Compared to that horror show, Australian pension assets were a sea of calm, falling just 0.1% in compound annual growth terms.
A global pension assets study from Willis Towers Watson’s Thinking Ahead Institute showed that reason for Australia’s significant global outperformance was a continuing inflow of super contributions combined with a very different asset allocation.
More shares and fewer bonds a win for Australia
Australia’s exposure to bonds was just 13%, while the average of the seven largest pension markets was 32%.
Bonds are traditionally seen as a safe haven in troubled times even though their performance tends to be stodgy, but during the past year they were a terrible place to be as the long period of falling interest rates was suddenly replaced by rapidly rising rates.
That smashed existing bond investments which had tiny or sometimes even negative yields, setting them up for massive capital losses when the market turned.
Australian funds also had a higher allocation to shares at 51% compared to the average of the seven largest pension markets of just 42%.
It could be that Australian super is further down the evolutionary pathway than many offshore funds given that since 2002 equity allocations among the largest pension markets has fallen from 50% to 42% and bonds have dropped from 38% to 32%.
Had those allocations fallen faster, it would have been protective of capital.
Australia ahead with defined contribution funds
The other trend identified by the study is also one that Australia is further along with the transition from defined benefit style of funds to defined contribution funds.
Defined benefit funds are becoming quite unusual in Australia and the same situation is true for the US but many other countries still have a lot of defined benefit schemes.
The study found that over the past 20 years, defined contribution fund assets have grown at a rate of 7.2% a year, compared to the 4.4% a year growth of defined benefit funds.
Apart from the obvious conclusion that defined contribution funds are becoming more popular, the different risk profiles for defined benefit funds might also have caused them to grow more slowly.