In a report released this week entitled Funding Australia: Superannuation and the Financial System, ISA extolled Australia's superannuation system which it said is on track to reach $7 trillion by 2030.
Superannuation currently provides $70 billion in retirement benefits each year; contributed an estimated $201 billion to Australia's capital stock between 2003 and 2014; accounts for two out of every three Australian dollars sourced for private equity for investment; and acts as a "stabliser" on market prices due to its long-term approach to investing, the report said.
Because a majority of superannuation is in accumulation funds ($1.62 trillion of the $1.8 trillion pool), it reduces risks to the financial system rather than adding to them, said the ISA report.
"Super funds can absorb losses, and their lack of leverage means they do not pass on losses to counterparties through defaults on obligations," said the report.
"Indeed, super funds are largely free from leverage, although developments in the SMSF market – where leveraged investments in property and shares are increasingly rapidly – are clearly threatening this situation," it said.
All of the other financial institutions – that is, banks, life insurers and general insurers – have direct exposure to market, credit, currency and/or interest rate risk "and may rapidly become insolvent and be unable to pay creditors", said the report.
"Due to the high levels of horizontal, vertical and conglomerate concentration, any such institutional weakness also carries a significant risk of contributing to financial contagion and perhaps systemic failure," the ISA said.
"In the absence of significant leverage, super funds can absorb market volatility without risk to themselves or other institutions. In contrast to other types of financial institutions, superannuation funds effectively are entirely capitalised."
