Dynamics of Super – The next 20 years

In the eighth edition of Deloitte’s Dynamics of the Australian Superannuation System, Deloitte models the components of the super industry, projects their growth, and comments on the market dynamics, demographic shifts, longevity and adequacy of the current system.

To order a copy of the full report, please follow this link http://landing.deloitte.com.au/Dynamics-of-super-2015-Inbound-registration-page.html

Deloitte research highlights some significant issues, including the fact that improved longevity means the proportion of retirees to working Australians has almost doubled in the past 60 years. While there are currently four and a half workers for each retiree in Australia, it is projected that by 2050 this will have dropped to just two and a third workers for each retiree. This means that managing the issues of adequacy and longevity have never been more important.

We propose some views for consideration including:

  • Underpinning the Superannuation Guarantee (SG) with effective concessions and incentives for voluntary contributions which could include both concessional contribution caps based on joint incomes and lifetime contribution caps
  • Increasing the Superannuation Guarantee to 12% as quickly as possible
  • A bipartisan superannuation policy by the Federal Government in accordance with the Murray Financial System Inquiry
  • Government incentives via the taxation system to encourage retirees to draw-down their superannuation as annuities, account-based pensions or other types of products which provide a stable income during retirement
  • Supporting continuing advancements in education and advice.

Projected total superannuation assets

Despite ongoing volatility in investment markets, the Australian superannuation industry has continued to grow in the past few years, with total superannuation assets rising from $1.6 trillion at 30 June 2013 to $2 trillion as at 30 June 2015.

The base projections from the Deloitte super model show that total superannuation assets in Australia will increase steadily to $9.5 trillion by 2035.

These projections reflect the legislated increases in the Superannuation Guarantee (SG) rate from 9.5% to 12% by July 2025, with the next increase (to 10%) scheduled to occur from 1 July 2021.

 Investment returns

Investment returns on superannuation assets remain a significant contributor to the growth of the superannuation industry. In the past three years there has been a return to the trend for net investment income to at least equal total net superannuation contributions.

The strategic asset allocation for each superannuation member’s assets has the greatest impact on the member’s final benefit; greater in fact than the selection of individual managers within each asset sector.

What this means: It is important that members do not invest too conservatively in the early to middle years of their working lives, so they can maximise the impact of investment returns compounding up to and into retirement. Given that superannuation is preserved for retirement, these members will be able to withstand the short-term volatility inherent in growth-oriented portfolios and achieve a higher long-term average return overall.

As total superannuation assets continue to grow larger, relative to the size of the Australian economy, this will increase pressure on the investment capacity of funds and will drive increased investments in alternative assets and across all asset classes in overseas markets.

Market share by major segments

We have mapped the movement of total assets in each segment from 1997 to 2015 compiled from APRA data and the Deloitte Super Model projected movement from 2015 to 2035. Highlights from these projections include:

  • Growth: Industry funds and retail funds are expected to grow significantly over the next 20 years with similar rates of overall growth, and slightly above the rate of growth of SMSFs.
  • Retail largest overall: Our projections indicate that the total retail fund sector will take over from SMSFs as the largest market segment in 2028 and reach $3 trillion in assets in 2034.
  • SMSFs – post retirement bulge: However SMSFs are still expected to be the largest sector by far in the post-retirement superannuation market, reaching $900 billion in 2035.
  • Industry and retail funds: It is not yet clear how successful industry funds and the large wealth management businesses will be in curtailing the rapid growth in post-retirement assets for SMSFs. There is considerable scope for funds to capitalise on the opportunity to develop new initiatives to capture a greater share of that market, such as providing members with more individual flexibility. Those that do this well will be most successful in retaining and growing their market share.
  • Public sector: Public sector funds are expected to continue to grow at a reasonable rate over the period, while the corporate segment will continue to slowly decline.