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Super funds display highest appetite for equities among global pension markets

By Rhea Nath
5 minute read

New research into global asset allocations has found Australian superannuation funds hold the highest allocations to equities and the lowest to bonds against peers like the UK and the US.

Australia has held fast as one of the five largest pension markets in 2023, trailing behind the US, Japan, the UK, and Canada but beating out Switzerland and the Netherlands in the seven largest (P7) markets, according to research.

It holds 4.4 per cent of the assets of the largest 22 pension markets and has the fourth highest ratio of pension assets to GDP at 145 per cent, trailing only the Netherlands, Switzerland, and Canada.

Unpacking the latest Global Pension Assets Study from the Thinking Ahead Institute, it was revealed that the Australian pension market held the highest allocation to equities (51 per cent) last year compared to its P7 peers. The US pension market allocated some 46 per cent to equities and Canada allocated 31 per cent.

According to the study, the weight to equities in Australia remained unchanged over the last decade, amid a clear contraction in equity allocations among the P7 from 50.7 per cent to 41.6 per cent.

Like others, Australia has demonstrated a reduced home bias within equities, the study noted.

Allocations to Australian equities fell from 80 per cent in 2003 to around 60 per cent in 2023. However, Australia has a more present home bias than its peers with the global average sitting at 60 per cent in 2003 and 36.3 per cent in 2023.

More broadly, the data indicated that Australian funds allocated 14 per cent to bonds last year, along with 11 per cent to cash and 24 per cent to other assets, which includes assets like private equity, real estate, and infrastructure.

Though bond and equity allocations have held steady across the last decade in Australia, there have been ebbs and flows in allocations to other asset classes and cash. More specifically, allocations to other asset classes rose from 26 per cent in 2013 to 22 per cent in 2018 and fell back down to 24 per cent by 2023, the study observed.

Similarly, cash allocations grew from 8 per cent in 2013 to 13 per cent in 2018 and declined to 11 per cent in 2023.

The study noted that overall, global pension assets grew around 11 per cent in 2023 to reach US$55.7 trillion, up from $50.1 trillion at the end of 2022.

Jessica Gao, director at the Thinking Ahead Institute, said that growth is “back on the agenda”.

“Pension assets are growing once again – just as the importance of the pensions industry itself consistently increases in a world facing new challenges and opportunities for future prosperity,” she said.

“This global growth is not yet rapid, and pension assets remain behind their pre-2022 position, but it is far better than the experience a year before. Inflation has moderated, and as a result, financial markets have remained supported by interest rates which appear also to have peaked, at least for now, in most countries.”

Ms Gao warned that, while the growth remained encouraging, rising systemic risks persist alongside the expectation that pension funds adapt to a fast-changing world.

“We are already seeing many asset owners redefine their operating model as a partnership of HI and AI – human intelligence and artificial intelligence – to craft and deliver innovative financial solutions, produce more accurate and timely reporting and foster organisational agility,” she said.

“Meanwhile, the pensions industry also faces a growing interest from regulators. Government influence on pension schemes is also at high level as governments look for new ways to fund the systemic investment needed to overcome capital-hungry systemic issues such as the energy transition, climate change mitigation and sustained high-tech growth.”

Australia’s defined contribution system

Interestingly, the Thinking Ahead Institute’s research also pointed out Australia’s dominant defined contribution (DC) system, comprising some 88 per cent of assets last year with just 12 per cent attributed to defined benefit (DB) assets. This has slightly increased from a decade prior, with 84 per cent DC assets and 16 per cent DB assets.

According to the study, the growth rate of DC assets in the P7 markets has been 6.6 per cent in the last 10 years, compared to a smaller pace of 2.2 per cent from DB assets.

Previously, the 2023 Mercer CFA Institute Global Pension Index ranked Australia fifth out of 47 retirement systems. This was up by one spot from 2022. It scored Australia a B+ grade, behind the Netherlands, Iceland, Israel, and Denmark that received an A grade.

Systems with a B+ grade were classed as those systems with a sound structure and many good features but fall short of a “first-class and robust retirement income system that delivers good benefits, is sustainable, and has a high level of integrity” of the top-ranked countries.

According to Dr David Knox, senior partner at Mercer and lead author of the index report, Australia is being held back from achieving an A grade status because there is no requirement that a portion of super savings be taken as an income stream.

He explained: “From the Retirement Income Review to the retirement income covenant, and the work to define an objective of superannuation, there have been some excellent developments in the retirement income space.

“But we still don’t compel Australians to take some of their super as an income stream. Retirees in A grade systems receive regular income in retirement and are therefore encouraged to spend knowing that their income will never run out. This is not yet the mindset in Australia, where we know that many retirees are underspending.”

In order to better support an ageing Australian population, which is expected to comprise over 3.5 million people aged 80 and over as outlined in the government’s 2023 Intergenerational Report, the country “must introduce a compulsory income stream for all retirees with a reasonable super balance”, Knox said.