Superannuation will remain a growth area for the next 30 years despite the ageing population, new research from Rice Warner shows.
Super’s funds under management have grown steadily in recent years and fund value now accounts for 140 per cent of GDP compared to only 10 per cent 30 years ago.
However the funds sector has split into winners and losers with 46 per cent of funds experiencing negative cashflows in the June 2016 year as their membership dwindles and ages.
The research group found there were a number of reasons behind the negative cash flow phenomenon:
- The growth in the industry is not uniform and many funds are sub-scale with little prospects for growth.
- Funds charge fees for each member account, yet there has been a reduction of more than 4 million accounts in the last seven years.
- The very large funds are increasingly winning more Choice members and more of their members are consolidating their superannuation accounts. These funds provide a wider range of services and have large marketing budgets and growing brand awareness and are winning business from smaller funds.
- Some funds are exposed to sectors of the economy with low employment growth, and will continue to lag funds operating in faster growth sectors such as health and aged care.
Pessimistic views on the industry commonly claim that the move to retirement of baby boomers will lead to large outflows from the industry in the form of lump sums over the next decade and this may eventually push the overall industry into net outflow territory.
Rice Warner analysis challenges that view saying it ignores many facts:
- Most assets are rolled over to pension products at the point of retirement rather than taken as lump sums
- Over half of pensioners take the minimum drawdown (which is less than the earnings on the fund in many years)
- Growth at younger ages will still be strong with:
- future increases in the Superannuation Guarantee to 12%
- high levels of immigration driving population growth.
“The reality is that, although long-term growth will be slower, the superannuation industry still has many golden years ahead of it,” the research said.
Rice Warner’s latest Superannuation Market Projections Report (to be released next week) projects that compound growth rates for super over the next decade will be 7.4 a year which would be higher than the 6.1 per cent a year achieved through the last decade which included the GFC.
Graph 1 shows that superannuation assets are expected to continue to grow as a percentage of GDP for another 30 years, peaking at more than 180 per cent. This comes despite the low interest rate environment and recent cuts to contribution limits.
Graph 1. Historical and 30 year projected superannuation assets as a percentage of GDP (2017 dollars).*
Graph 2 shows that cashflows excluding investment returns will head into negative territory by 2038. However, that will not push the industry into negative territory as growth will come from strong investment returns on the large body of assets, including investments held for retirees.
Graph 2. Superannuation system cashflow projections
Cashflow presents a challenge for more than half of the superannuation funds but consolidation of funds and member accounts will help solve this problem and and superannuation will be a growth industry for another 30 years. The continued high levels of liquidity will allow funds to remain as patient long-term investors, Rice Warner found.