Superannuation savings will grow to become the largest financial force in the country over the next 15 years, outstripping the banks, according to super consultancy and actuaries Rice Warner.
The growth predicted will see the amount of money invested in super jump from the current $2.7 trillion to $4.8 trillion. That represents a conservative growth rate of 4 per cent a year.
“Superannuation will soon dominate the whole economy and will exceed the size of the banking industry, but without the same capital constraints,” Rice Warner said in a research paper released on Friday.
Already superannuation has grown to top 150 per cent of GDP and the increases predicted by Rice Warner will see this relative position grow further. That’s because GDP is growing only by about 2 per cent, whereas even Rice Warner’s conservative estimates have super growing twice as much.
That growth will see the super funds become fully fledged investment houses that own a wide range of assets in a process that has already begun.
“Large funds are already innovative in moving into ownership of other (related party) financial services businesses, usually via private equity or venture capital,” the paper said.
The average size of funds grows each year, particularly with pressure from regulators to get small or under-performing funds to merge.
“Within five years, there will be 10 funds with more than $100 billion of funds under management.”
Currently there is only one fund, AustralianSuper, which breaches this mark at $150 billion. However, when the merger of VicSuper and First State is completed, the new entity will join that club at $120 billion.
The Future Fund, with $166 billion under management, is also a member of the club but while it will provide retirement income for pubic servants it has only one member, the Commonwealth. That makes it a very different operation than big industry funds with millions of members.
The structure of the super sector has changed over recent years with retail funds [for profit funds usually owned by banks] falling dramatically as a percentage of funds under management.
“We failed to see the implosion of the commercial (retail) sector. Weak management and a failure to respond to the changing marketplace has led to a fall in market share from 37 per cent to 26 per cent of the industry. Similarly, we expected the SMSF [self-managed super fund] segment to grow to about $400 billion today, but huge tax advantages over the last decade meant much higher growth to $750 billion,” Rice Warner said.
However that growth of SMSFs has slowed dramatically following the introduction of tighter contribution caps from 2017. Figures released by the Australian Prudential and Regulation Authority recently show that by September 30 this year the industry funds sector had already overtaken SMSFs as the largest category of super funds.
In September industry funds had $747.4 billion invested while SMSFs had $746.2 billion. Retail funds had $632.4 billion and public sector funds had $528.5 billion. However public sector and industry funds are expected to take the lion’s share of growth in coming years.
As the chart shows industry and retail funds will dominate growth in accumulation mode as they have a far more younger members who contribute to super while working rather than withdraw through retirement. Retail funds and SMSFs have an older membership profile and will likely shrink relatively as their membership ages.
“Bravely, we assume the ]retail] sector will still have 25 per cent of assets in 15 years,” Rice Warner said. However the growth in the sector will likely be in new companies who can compete in the default space rather than traditional bank-owned funds.
As time passes average balances will rise with members spending more of their working lives earning the current 9.5 per cent of salary under the super guarantee. If, as planned, the SG rises to 12 per cent by 2025 balances will increase further.
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