Superannuation Boom: Australian Super Funds Expand Overseas Holdings

A recent report has revealed that the introduction of compulsory superannuation has increased household savings, contributing more than AU$500 billion since its establishment.

The surge in savings has also helped reduce the reliance on government-funded age pensions, which provide financial support to seniors, the report by the Association of Superannuation Funds of Australia (ASFA) said.

"There's AU$4.2 trillion of members' money under management in superannuation," Mary Delahunty, chief executive of ASFA, said. "That makes Australia one of the top investors in the world."

The ASFA report highlighted Australia's efficiency in managing retirement support. Currently, the country allocates approximately 2.3% of its GDP to age pensions, a figure that is on the decline. In comparison, Australia's spending is lower than most other nations, with South Korea being the only country spending less at 1.3% of GDP, though this is expected to rise sharply to 7.5% by 2060.

"It'll go down to around 2% by 2060," ABC quotes 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% and growing, and they will be above 10% by 2060."

Global investments

Superannuation assets in Australia have grown to a massive AU$4.1 trillion as of the September 2024 quarter. These funds are now being invested globally, with investments spanning from a toll road in Indiana, U.S., to port terminals in Vancouver and airports in Australian cities like Adelaide, Perth, and Darwin.

With over AU$3.2 billion in superannuation contributions flowing into the system each week, Australian funds have huge resources to allocate. However, these funds are not just focused on Australian assets; they are diversifying investments to mitigate risk, purchasing international stocks, office buildings, toll roads, and more.

"We currently have the fourth-largest pension pool of capital in the world," Sam Sicilia, chief investment officer at super fund HostPlus, said, with only the US, the United Kingdom and Canada ahead.

Within the next five to seven years, Australia is expected to surpass the UK and Canada, making it the second-largest pool of capital globally, Sam Sicilia added.

Costs of the super: Government concessions

The superannuation system, however, has its own costs.

The most recent federal budget for 2024-25 shows that the Australian government will forgo AU$29.2 billion in tax revenue due to concessions on superannuation contributions. Additional tax breaks on super earnings will cost the government AU$22.2 billion, while other related concessions will add another $3.8 billion.

Despite these costs, ASFA maintains that the combined total of superannuation-related tax concessions and age pension expenditures remains manageable and sustainable.

ASFA projects that the cost of tax concessions for super contributions will stabilize at around 0.9% of GDP. However, the cost of tax concessions on investment earnings is expected to rise from 1% to 1.5% of GDP by 2062-63.

Scale of super funds raises concerns

Despite this diversification, large super funds control around 21% of the shares listed on the Australian Stock Exchange, raising concerns about the financial system's capacity to absorb such large investments.

According to Deutsche Bank's macro strategist, Lachlan Dynan, as these funds continue to grow, their need for liquidity and access to international markets is becoming more pressing. "As they become a bigger chunk of markets, the potential concern is that they want to access more liquidity overseas," Dynan explains.