Ross Stitt describes the Australian superannuation system as one New Zealand rejected in a fit of political pique, and one that is compulsory, skewed to higher risk profiles, with higher returns

I was recently asked by a kiwi friend about the major differences between the Australian economy and its counterpart across the Tasman. The two that immediately sprang to mind were Australia’s mining sector and its superannuation system.

My friend acknowledged the first difference but suggested that, in KiwiSaver, NZ now has something similar to Australia’s super system. That reflects a failure to appreciate the scale and significance of the Australian system.

Last month, the Australian Prudential Regulation Authority released the superannuation statistics for the September 2024 quarter. They revealed total Australian superannuation assets now exceeding A$4 trillion (NZ$4.4 trillion). That compares to just NZ$110 billion in KiwiSaver at 31 March 2024.    

In the September year Australians contributed more than A$190 bln to super while in the March year kiwis contributed just over NZ$11 bln to KiwiSaver.

The scale of contributions in Australia is driven primarily by three factors – the compulsory nature of the super system, the inability to withdraw super funds before 60, and the generous tax concessions provided for both contributions and superannuation earnings.

Employers are required to make a minimum contribution equal to 11.5% of an employee’s earnings. That will rise to 12% next year. This ‘superannuation guarantee’ creates a constant stream of money pouring into the super system.    

Australia now has the fifth largest pension or savings market in the world after the US, Japan, the UK, and Canada. Superannuation assets are equal to around 150% of Australia’s GDP, a ratio that puts Australia fourth behind the Netherlands, Switzerland and Canada.

A $4 tln superannuation pool has enormous consequences for the Australian economy. Obviously, it generates wealth and financial security for many Australians and takes pressure of the means-tested state age pension. However, it also stimulates the growth of financial markets and provides capital for investment throughout the economy, including in vital infrastructure.

Unsurprisingly, the growth of Australia’s super system has led to some huge superannuation funds and the emergence of a substantial funds management industry.

The two largest super funds, based on a not-for-profit mutual fund structure, are AustralianSuper which manages more than A$340 bln and Australian Retirement Trust with around A$310 bln. The next six biggest funds each manage more than A$80 bln.

These funds have the advantages of scale, including access to sophisticated investment opportunities worldwide, diversification by asset class and jurisdiction, the capacity to invest directly in high-value assets, and the ability to charge lower fees than smaller funds.

International diversification is a key feature of the Australian super system. Given the numbers involved, it’s necessary both to maximise returns and to avoid excess exposure to the domestic Australian economy. The system enables individuals with small super amounts to invest indirectly in a wide range of jurisdictions that would otherwise not be available to them. 

AustralianSuper illustrates this international diversification. With over 3.4 million members, it now has around half its funds, or A$150 bln, invested offshore and has offices in London, New York, and Beijing.

Diversification of asset class is another key feature of the super system. Again, the goal is to spread risk. Data from the Thinking Ahead Institute shows the asset allocation in the world’s seven largest pension markets.   

2023 asset allocation in top seven pension markets

Source: Thinking Ahead Institute

Australia has the highest allocation to equities and the lowest to bonds. This constitutes a higher risk profile than the other pension markets. That leaves the Australian super system much more exposed than those markets to a stock market crash of the type seen in 1987, 2000, and 2007.

In recent years at least, the Australian system has produced healthy returns. Chant West tracks the performance of Australian super funds based on their investment approach – from the lowest risk ‘conservative’ to the highest risk ‘all growth.

Diversified fund performance (results to 30 June 2024)

Source: Chant West

These are impressive numbers and they help to explain how the super pool has grown to more than A$4 tln. That growth also confirms the wisdom of Warren Buffet’s faith in the power of compounding.

In the 32 years to June 2024, the growth category experienced only five negative annual returns. Still, as most funds management advertising constantly repeats, ‘past performance is no guarantee of future performance’.

In recent months, some potential risks with Australia’s super system have been in the news. The IMF’s Global Financial Stability Report in October highlighted a liquidity risk. While there are comprehensive restrictions on the ability of super fund members to access their funds, members can switch between different investment options in a matter of days, eg. from ‘high growth’ to ‘conservative’. That could create liquidity problems for a fund with significant illiquid exposures such as private equity and hedge fund investments.

In the Reserve Bank of Australia’s Financial Stability Review in September, the RBA identified super funds as ‘an increasingly important part of the Australian financial system’. For example, super funds ‘directly hold nearly one-third of bank short-term debt securities and over one-quarter of equity issued by domestic banks’.

According to the RBA, this connectedness carries some risk including ‘the ability to amplify shocks’. To ameliorate the risk, the RBA states that super funds need to ‘strengthen their liquidity risk management practices’. 

The other major risk of the Australian super system is a fiscal risk. The tax concessions built into the super system, including zero tax on earnings once a person retires, have contributed to its success. However, those concessions are becoming increasingly expensive as the amounts invested in super rapidly rise.

The current version of Australia’s compulsory super system began in 1992. Many kiwis don’t realise that a NZ Labour government introduced a compulsory superannuation scheme nearly two decades earlier. However, it was soon cancelled by the next National government under PM Robert Muldoon.

It’s an interesting counterfactual to consider how different the kiwi economy would be today if that scheme had survived.

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.