Deloitte has warned that superannuation funds will dominate the ASX within 20 years as total assets hit $10.2 trillion in 2038.
Despite ongoing volatility in investment markets, and historically low inflation and cash rates, the Australian superannuation industry has continued to grow.
Total superannuation assets rose from $2 trillion at 30 June 2015, to $2.7 trillion at 30 June 2018.
In its latest modelling, Deloitte projects Australia’s total superannuation assets will continue to increase over the next 20 years to $10.2 trillion by 2038.
Diane Somerville, principal, Deloitte Actuaries & Consultants and author of The Dynamics of the Australian Superannuation System – The next 20 years to 2038, said these projections reflect the legislated increases in the superannuation guarantee from 9.5 per cent to 12 per cent by July 2025, with the next increase to 10 per cent scheduled to occur from 1 July 2021.
Ms Somerville added that an important caveat to the projected 275 per cent growth in total superannuation assets to $10.2 trillion is that the current low interest rate environment, that has continued to prevail both in Australia and globally for more than five years, is likely to remain the “new normal”.
“Despite this low interest rate environment, super fund returns continue to be strong. In spite of short-term volatility, funds have consistently earned robust returns over the medium term, ensuring average balances at retirement have increased. Add to this the fact that many members have received superannuation contributions for a significant proportion of their working lives,” she said.
The report points out that the impact of a $10.2 trillion asset allocation on the Australian share market could be considerable and dominate the Australian Stock Exchange (ASX) given there is a high percentage of assets currently invested in equities, of which a significant proportion are domestic equities.
Deloitte Superannuation lead partner Russell Mason noted that currently the total investment by superannuation funds in Australian shares comprises around 35 per cent of the total market capitalisation of the ASX.
“If they retain the same percentage allocation, this will increase to more than 60 per cent by 2038 – almost double the current allocation – and so dominate the ASX’s holdings,” he said.
“A key issue will be whether there will be enough capacity in the ASX to support this level of demand from superannuation funds, given that there are also individuals and companies seeking to invest non-superannuation monies.”
Speaking on a panel at the inaugural Crescent Think Tank in Sydney back in October, former Liberal Party leader John Hewson has questioned the management of superannuation funds.
“Most of the $2.9 trillion of superannuation money is invested in stock markets, primarily in the US and Australia,” he said.
“You are heavily exposed when those markets are as overvalued as they are. By any measure the US stock market is way overvalued. There is going to be a correction. It’s just a matter of when and how far. Super funds are taking a risk by staying in those markets.”