Australia’s US$1.6 trillion pension (superannuation) system is the fourth largest in the world
15 Feb 2017
- Australian Economy
- Managed Funds
Last year, Australia not only became the world’s fourth largest pension (locally called ‘superannuation’) market valued at US$1.6 trillion but also experienced one of the highest growth rates of pension fund assets in the world, according to the Willis Towers Watson Global Pensions Asset Study - 2017. The latest figure for Australia’s pension assets represented a compound annual growth rate (CAGR) of almost seven per cent between 2006 and 2016 (in US$ terms). This rate was well above the global average of four per cent over the same period.
Australia’s pension assets rose to 126 per cent of GDP in 2016, up from 104 per cent a decade ago. This latest ratio was the second highest among the 22 major pension markets in the survey. The findings illustrate the size and long-term growth of Australia’s pension system, which is a major driver behind the country’s rapidly expanding, globally significant managed funds (MF) industry. Australia’s asset pool of MFs is the sixth largest in the world and the largest in Asia with total assets of US$1.6 trillion, according to the survey of the US-based Investment Company Institute.
Australia’s MF industry has been dominated by our domestic pension funds which have accounted for around 96 per cent of the country’s total MF assets. Total consolidated assets of Australia’s MFs rapidly surged from only A$255 billion in December quarter 1991 to over A$2,774 billion in September quarter 2016. This solid growth in Australia’s pool of pension assets has been largely driven by the universal and mandatory ‘Superannuation Guarantee’ scheme introduced in 1992, along with an efficient regulatory environment, an innovative financial system as well as solid economic growth.
The 2017 Willis Towers Watson’s Global Pensions Asset Study found that:
- Global institutional pension fund assets in the 22 major markets covered by the study were estimated at US$36.4 trillion in 2016, representing a CAGR of 4 per cent over the past decade.
- By asset value, the US has remained the world’s largest pension market (accounting for 61.7 per cent of the world total), followed by the UK (7.9 per cent), Japan (7.7 per cent) and Australia (4.3 per cent).
- In US dollar terms, the pension markets of the US and UK have risen by 4.9 per cent and 1.6 per cent each year respectively since 2006, while the Japanese market shrank by 0.4 per cent per annum. Over the same period, Australia’s pension assets have grown much faster, at an average rate of 6.9 per cent per annum – the second highest CAGR after Hong Kong (7.8 per cent a year from a low base) among the surveyed markets.
- Ten-year figures (in local currency) show that the Netherlands grew their pension assets the most as a percentage of GDP, with the ratio increasing by 33 percentage points (ppt) to reach 168 per cent, followed by Canada (up 30 ppt to 103 per cent), Australia (by 22 ppt to 126 per cent) and the USA (up 21 ppt to 121 per cent).
- Over the same period Ireland’s pension assets to GDP ratio has declined by eight ppt to 42 per cent of the GDP, and Japan’s ratio fell by five ppt to 59 per cent of GDP.
- When compared to the other members of the world’s seven largest pension markets (P7), Australia also has the highest proportion in defined contribution assets (87 per cent) relative to defined benefit assets (13 per cent). In contrast, Canada, Japan and the Netherlands have the highest proportion in defined benefit assets of around 95 per cent.
- At the end of 2016, the average global asset allocation of the P7 in 2016 was 46 per cent equities, 28 per cent bonds, 24 per cent other assets (including real estate and other alternatives) and 3 per cent cash. The US (49 per cent), Australia (49 per cent) and the UK (47 per cent) have higher allocations to equities than the rest of the P7. Japan, the Netherlands and Switzerland have more conservative investment strategies – higher allocation to bonds with ratios of 59 per cent, 54 per cent and 37 per cent respectively.
The study covers 22 major pension markets, which total US$36 trillion in pension assets and account for 62 per cent of the GDP of these economies. China, Finland and Italy were added to this year’s study.
Reserve Bank of Australia, Statistical Tables B18 MANAGED FUNDS
Towers Watson’s deeper analysis for the seven biggest markets (P7) – USA, UK, Japan, Australia, Canada, Netherlands and Switzerland.