Australian superannuation funds have a much higher exposure to volatile share markets than almost any comparable country without earning higher returns, according to new figures.
The OECD’s annual Pension Markets in Focus report has found that Australia’s pension (superannuation) system had 51 per cent of its assets in shares in June 2016, more than twice the weighting of Canada, with 23 per cent.
The US had 31 per cent, the UK 14 per cent and Denmark 22 per cent.
Conversely, Australian pension funds invest considerably less in bonds than their international counterparts with only a 10 per cent exposure in 2015-6 – that compared with 23 per cent for Canada, 31 per cent for Denmark and 25 per cent for the UK.
Shares are generally considered a higher risk/return investment category, however Australia’s investment returns have not outperformed comparable OECD countries.
Over 2015-6 Australian pension funds returned 1.9 per cent after inflation compared with 7.2 per cent in the Netherlands, 4 per cent in Canada, 5.9 per cent in Denmark and 3 per cent for the average of OECD countries.
Over a five year period Australian real returns were at the higher end of the scale, 5.8 per cent, but still below Canada’s 6.9 per cent and a number of other countries that returned more than 6 per cent.
Returns over 10 years were influenced by the GFC and Australia’s rate came in at a low 2.9 per cent.
That was below Canada, the Netherlands and Denmark but bettered a lot of countries that were hard hit by the crisis.
Ian Fryer, researcher with Chant West, said 10 year returns reported by the OECD “match ours” but the reported five-year returns were significantly below what Chant West calculates. That difference could be a result of the OECD grouping different fund types together.
“The balanced option was similar to what the OECD reported,” Mr Fryer said.
“The data is only up until 2016 and if you added in 2017, a good year for Australian funds, our numbers would look better. Over the longer term equities outperform bonds and cash,” said a spokesman for the Association of Superannuation Funds of Australia.
Independent economist Saul Eslake said the difference in Australian pension fund investment choices was a result of a number of factors.
“Australian superannuation benefits are still mostly paid in lump sums which means funds have to have the liquidity to make those payments. In places like the UK and the Netherlands more people take pensions and annuities, so funds need the regular income provided by bonds to meet those commitments,” he said.
“There have also been less bonds available in Australia because governments have run smaller deficits. For 11 years the federal government ran a surplus which meant they didn’t have to sell bonds.”
Stephen Anthony, chief economist with Industry Super Australia, said “where there are a lot of defined-benefit schemes, they try to match commitments from regular income paid by bonds and similar assets”.
OECD figures showed that defined-benefit pensions were less than 10 per cent of Australian retirement fund commitments, whereas in Canada it was over 50 per cent and in the US almost 40 per cent.
Mr Eslake said returns for systems with high exposure to bonds had been strong in recent years because falling interest rates had pushed the price of bonds up.
“There has been a tremendous bull market in bonds with yields going to their lowest level in recorded history in some cases,” he said.
Conversely, when interest rates start to rise, bond prices will fall, and funds with heavy exposures will be hit. In that situation Australia’s share- based system should start to outperform.