Australia is the world’s most successful pension market with assets under management increasing by 11.3 per cent a year over the 20 years to 2020, according to the latest Global Pension Assets study conducted by risk advisers Willis Towers Watson.

But before you plan an early retirement, that figure does not mean your fund will have averaged a return of 11.3 per cent over 20 years.

What it means is the total funds under management in our superannuation system increased by that amount – a figure that includes fund returns and rising contribution levels made by a growing workforce.

WTW’s pension think tank, Thinking Ahead Institute, explained Australia’s super success this way: “The critical features in this success have been government-mandated pension contributions, a competitive institutional model and the dominance of DC [defined contribution].”

In other words, the system has grown for three reasons.

• Find out – How super funds performed in February 

Firstly, it has grown because the federal government requires all employers to contribute a rising amount of money into their workers’ pensions.

This amount is currently set at 9.5 per cent of workers’ wages but is scheduled to rise to 12 per cent by mid-2025.

Secondly, because workers can choose their funds, all funds compete for contributions and have a strong incentive to perform highly.

And thirdly, Australian super is overwhelmingly based on defined contributions, not defined benefits.

Because the latter promises a given retirement amount, funds using this model have to be very conservative and invest heavily in bonds to ensure they have the revenues to pay pensions regardless of what’s happening in financial markets.

Bonds are not a growth asset like shares and property so a defined benefit system grows more slowly.

WTW’s research shows Australia’s super system gained a lot of clout during 2020, growing from 151 per cent of GDP to 175 per cent.

That performance impressed Jessica Melville, investment strategy chief of Willis Towers Watson.

“Australia’s performance, where assets rose to 175 per cent of GDP (up from 151 per cent the year before) was particularly impressive, considering [there were] over $36 billion in outflows because of the early access to super scheme,” Ms Melville said.

“While early release supported members in their time of need during the pandemic, Australian funds have shown considerable resilience and they will continue to play a significant role in the nation’s recovery.”

Two factors explain the big increase in the industry’s size relative to the overall economy, said Stephen Anthony, chief economist at Industry Super Australia.

Dr Anthony said “overall GDP declined because of the pandemic so the relative position of super was stronger”.

And the extraordinary sharemarket recovery from the pandemic, which has seen the average balanced superannuation account climb 18 per cent since April, has also played a part, he said.

• Related – Young people dominate early super withdrawals

The structure of Australia’s super system enabled funds to capitalise on this recovery, as local funds are more exposed to shares than their international counterparts.

As the following chart shows, Australia has 48 per cent of pension assets in equities compared to 44 per cent for Canada, a country with a similar system to Australia’s, and 47 per cent for the US.

Most other countries surveyed invested roughly 30 per cent of pension assets in equities (shares).

Another driver of Australia’s strong performance is the growing importance of alternative assets in the system, which now account for 24 per cent of total assets.

“Bond rates have been falling for some time and the industry funds saw early that they could get bond-type returns from assets like infrastructure and property so they moved,” Dr Anthony said.

Moving from fixed interest to infrastructure meant there were no income cuts as bond rates fell.

In fact, the value of the alternative assets increased because their returns were more highly valued by investors.

The growing size of super in the economy is positive and boosting investment in infrastructure, said Nicki Hutley, partner with Deloitte Access Economics.

“Some countries like the US notionally save for retirement through the government. But it is spent on other things and some of their pension systems are completely underfunded,” Ms Hutley told The New Daily.

“If you are investing large amounts into the superannuation system, the main thing is that you have confidence in the system, which we do.

“If you invest through the private sector, it is generally more efficient than if done through the government and in our system there is a lot of scrutiny.

“If people saved for themselves instead of through superannuation it could be spent on consumption rather than invested. So you could argue that we have a lot more investment in things like infrastructure because of superannuation.”

Australia has had the strongest growth rate in pension assets among comparable countries over the past 10 years, with assets growing at an average annual rate of 8.7 per cent.

The US, Italy and Ireland followed with 7.9 per cent, 7.8 per cent and 7 per cent respectively.

The New Daily is owned by Industry Super Holdings