Growth allocations and mergers have bolstered Australian funds but improved governance and diversification should be on the agenda, according to Willis Towers Watson.
Assets under management (AUM) at the world’s largest pension funds increased in value by 15.1 per cent in 2017 to reach a total of US$18.1 trillion, a significant increase from the 6.1 per cent growth achieved in 2016, according to the latest global 300 research from Willis Towers Watson’s Thinking Ahead Institute.
Australian funds have generally continued to move up the rankings, with the biggest, the Future Fund, moving to 26th on the list.
“Australia has 17 funds on the top 300 list – around 6 per cent by the number of funds. In terms of both relative positioning and net participants, Australia has continued to fare incredibly well,” Willis Towers Watson senior investment consultant Paul Newfield said.
“Over the past five years, we have had two net new entrants, second only to the United States. Many other developed countries including Canada, [the] UK, Germany and others have actually had reductions in the number of funds they have on the list.”
Last year was a strong year for Australia. Mr Newfield noted that VicSuper was a new entrant to the ranking in 2017.
“Of the remaining 16 funds which were on the list from previous years, 15 improved their relative positioning, which is evidence of the strong growth underpinning Australia’s retirement savings system,” he added.
Compulsory superannuation contributions, the high allocation to growth investments such as equities and real assets relative to global peers and continued merger activity within the Australian landscape have all contributed to the success of Australian funds over 2017, Mr Newfield said.
“Those funds with the highest allocation to equities and real assets or who merged in recent years have tended to jump further ahead on the list.”
However, while the past results are extremely positive, Willis Towers Watson is concerned about the likely future returns over the next five years.
“We believe that risks are skewed to the downside,” Mr Newfield said.
“We advocate for more diverse portfolios to increase the likelihood that funds can perform well if significant risk events occur, while still providing solid returns if the markets continue to perform well.”
Governance is a key area of concern, as the royal commission has illustrated a number of shortcomings within the Australian system and how funds have operated.
“While we have a big superannuation system and one that has generated good returns on average, our system has not lived up to member expectations in terms of building trust and delivering retirement outcomes,” Mr Newfield said.
“Improving governance is an area for attention; studies have shown that improved governance could deliver an additional return of around 1 per cent per annum.”
Willis Towers Watson also believes that diversification should be improved among Australian funds.
“We believe that risks are skewed to the downside although the expected return is still positive. By that, we mean that a negative surprise and reduced returns are more likely than returns surprising on the upside.
“Given the increase in political, economic and capital markets uncertainty and risk, we are strongly encouraging all our clients to diversify their portfolios. This will improve the likelihood of funds delivering on the commitments made to members, regardless of the single economic outcome that eventuates. This is extremely hard because, particularly in Australia, funds and other bodies continue to place excessive weight on short-term, peer-relative returns.”
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