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Investment Enews
September 2017


The story of Australia’s superannuation system is still told all too infrequently. From the introduction of the first federal pension in 1909, to the commencement of the superannuation guarantee in 1992 to the mature and flourishing industry today, Australia has pioneered one of the world’s leading national responses to an aging population.

In this edition of Investment eNews, we take an historical and statistical journey through the Australian superannuation system.

The History of Australia’s Superannuation System

Prior to Federation, there was no publicly-funded social security system in Australia. Aged and needy people generally relied for even their most basic needs on their personal savings or charitable relief from voluntary organisations. The inadequacy of these arrangements was recognised and the various states gradually introduced various pension schemes from 1900.

On 1 January 1901 the Commonwealth of Australia was formed by federation of the six states under a constitution which provided specific authority for the new Commonwealth Parliament to legislate in respect of aged and invalid pensions. In June 1908 the Commonwealth exercised this power with the introduction of means-tested, flat-rate aged and invalid pensions coming into operation in July 1909 and December 1910. The aged pension was paid to men from age 65 and to women from age 60. Whilst this was a generous scheme by the standards of the day, it must be remembered that life expectancy at this time was just 55 for males and 58 for women, so the public purse was not overtaxed!

The Increasing Burden on the Budget

Throughout the 20th century, in one of the greatest achievements in human history, life expectancy increased dramatically. Males and females of all ages experienced sustained improvements in their life expectancy. This was a phenomenon that was experienced across the world, but Australian citizens were prominent beneficiaries. Indeed, according to UN estimates for 2005-10, Australian life expectancy at birth for boys was exceeded only by Iceland, Hong Kong and Switzerland and life expectancy at birth for girls was bettered only by Japan, Hong Kong, France, Italy, Switzerland and Spain.

Now one might think that increasing life expectancy is one of the key indicators of a prosperous and successful society. But – all things being held equal – it brings with it some significant economic challenges. More people living longer means more people of retirement age. More people of retirement age means more people drawing on the aged pension. More people drawing on the aged pension puts serious pressure on government finances.

One key measure of the ‘social security’ demand on government finances is the dependency ratio. This measures the proportion of the population that is dependent on government or family support because of age. Dependents can be either lower or higher than working age. The popular economics commentary website, macrobusiness, some years ago published a much-cited graph showing Australia’s projected dependency ratio in the years ahead.

It was and remains clear that serious steps need to be taken to ensure that Australia’s budgetary settings are sustainable to meet the challenge of aging populations in the years ahead.

The Introduction of the Superannuation Guarantee

In many ways, Australia has consistently been ahead of most of the rest of the world in preparing to meet these challenges. Through the 1980s, the various Hawke-Keating governments adopted employer superannuation contributions in lieu of wage rises in the ‘Accord’ process. This was initially 3%. The first employee/employer fund (CBUSS) was formed in 1984 and the superannuation industry as we know it today was off and running.

In 1992, the Superannuation Guarantee extended retirement savings to 72% of workers. Employers were required to make a prescribed contribution to a complying superannuation fund and super contributions were locked into a progressive increase from 3% to 9% by 2002.

Despite differences on some technical matters, the election of the Howard-Costello government in 1996 saw continued federal government support for the superannuation system. Assets under management continued to grow strongly as employer contributions increased and in 1998 the newly established Australian Prudential Regulatory Authority (APRA) took over as the lead regulator. In 1999, the Superannuation Industry Supervision Act was amended to allow for self-managed superannuation funds (SMSFs) to be regulated by the Australian Taxation Office (ATO). As we will see in a moment, this proved to be a very significant, but initially under-rated, development.

Overview of Superannuation and Pensions in Australia Today

As at the end of June 2017, the Australian Superannuation sector holds an extraordinary $2.32 trillion in assets under management. The SMSF sector is the largest with $696.7 billion, followed by the retail ($587.8) and industry ($545.2) fund sectors. The extraordinary growth of the SMSF sector was not expected by regulators and itself merits serious analysis. In the discussion below, we focus first on the APRA-regulated funds, then consider SMSFs separately.

Asset allocations – APRA funds

The asset allocation of the APRA funds has a significant bias to growth assets, with equities alone comprising around half of assets under management. Interestingly, these equities exposures are split 50/50 between the Australian and international share markets. With an exposure of $351.0 billion to Australian equities, APRA super funds hold 19.8% of shares on issue on the ASX.

Source APRA

One measure of the maturity of the superannuation sector is the level and balance of flows into and out of the system. In FY17, total contributions (encompassing employer, member and government co-contributions) were $116.9 billion (FY16 $104.2 billion), still significantly outpacing member benefits of $74.5 billion. Notably, however, benefit payments are increasing rapidly, up 15.1% year on year, from $64.7 billion in FY16. This reflects the increasing number of members reaching retirement age and entering the ‘draw down’ phase of investment. As always, the main ‘volatile’ item is investment income and FY17 was a good year for APRA super funds, with the sector achieving $140.6 billion, reflecting strong returns that resulted in a 5 year rolling return above 9% by the end of the year.

The Increasing Burden on the Budget

it should be noted, of course, that the performance of the APRA super fund sector can itself be broken down into segments, depending on the type of fund being considered. As the chart, left, shows, the five year rolling returns of industry funds continues to outperform other types of APRA super fund, including the public sector, corporate and retail (most bank-owned) superfunds. This is impressively consistent outperformance by the industry fund sector should be acknowledged. However, it should also be noted that it was driven to a significant degree by asset allocation.

As the graph (right) shows, industry funds have comparatively higher levels of investment in illiquid assets (such as property and infrastructure) that have performed very strongly in recent years. Retail funds have invested more in cash and fixed interest. Their rationale for this is sensible. Retail funds have a less ‘sticky’ membership base, not being default funds under industrial awards. They should therefore maintain a more liquid and conservative asset/liability profile than the industry fund sector. They would also point to the fact that the various asset classes, over time, all tend to enjoy their ‘moment in the sun’, as the asset class ‘periodic table’ shows.

Thus, when the performance of property and infrastructure drops, so will the performance of the industry fund sector. Further, the Federal Government is attempting to remove the default status of industry funds. If they succeed, the industry fund sector may well have to review its asset allocation decisions. This complexity must be borne in mind when comparing the performance of the various types of superannuation fund.

Taxonomy of the self-managed superannuation fund sector

(all statistics here sourced from ATO, ABS and La Trobe Financial)

The biggest surprise for superannuation policy makers has been the rise of the self-managed superannuation fund sector. By the end of March 2017 (the latest date for which the Australian Taxation Office has published statistics), there were 590,742 SMSFs in Australia with 1.12 million members. Numbers continue to grow with annual net SMSF establishments running at around 25,000 p.a. The increase in wind ups of SMSFs that some had pointed to as heralding an end to SMSF growth has reversed.

As the SMSF sector matures and members reach retirement age, outflows in the form of benefit payments are also increasing. Total benefit payments from SMSFs were $36 billion in the 2014-15 financial year, a massive contribution and benefit to Australia’s retired population and a significant and generally unmeasured relief to government finances and the taxpayer. However, member contributions continue to increase so average and median assets per SMSF and per SMSF member grew strongly year on year. Median assets per SMSF were $631,007 at the end of the 2015 financial year.

One interesting observation is that time and increasing asset size does not appear to be delivering significant cost savings to SMSF investors. In the 2015 financial year, the sector expense ratio was 1.16% p.a. ($7,319.68 based on the median SMSF balance), up from 1.08% p.a. in the 2013 financial year. The administration and operational expense ratio was stable at 0.52% p.a., but the investment expense ratio had increased from 0.57% p.a. to 0.64% p.a. over the period. This compares with an operating expense ratio for financial year 2017 of 0.43% p.a. and an investment expense ratio of 0.24% for APRA-regulated funds, who are currently seeking to in-source investment functions in an attempt to reduce costs further). The obvious conclusion is that aggregate costs have reached their floor in the current environment and that future cost savings may depend on significant regulatory and/or technological developments. It should be noted, of course, that these ‘average’ figures may differ significantly from the experience of individual SMSFs. Initial SMSF advice can vary (depending on the scope of the advice and the complexity of the situation) from between $1,500 and $10,000, with some online providers as low as around $1,000. The actual establishment (legal documents, ASIC registration of corporate trustee etc) also vary from provider to provider but can be around $1,500. After that, ongoing administration costs (account keeping and audit) will depend on the size and complexity of the fund but are generally between $2,000 and $5,000 per year and additional services are extra.

Unsurprisingly, SMSF members tend to skew to older age groups, but there is a substantial proportion of SMSF members in the 35-44 age range. Some of these members will have joined SMSFs originally established by their parents, but in many cases these members see an SMSF as an important part of their retirement savings strategy. It is also no surprise that SMSFs are dispersed broadly in line with the Australian population. Only Victoria has a materially higher share of SMSF members than its population would suggest, whilst Queensland and Tasmania are notably under-represented.

It has long been the case that SMSFs invest most heavily in cash and Australian shares. Notably, the enduring low interest rate settings have changed that equation somewhat, with aggregate SMSF exposures to cash dropping from 32.7% in June 2012 to 24.2% in March 2017. Non-residential property exposures have remained remarkably consistent at around 12% of total SMSF assets. Interestingly, asset allocations change significantly depending on the size of the SMSF. The latest available analysis is for 2015, but it shows that the larger the fund, the lower the exposure to cash. It is to be expected that larger funds would have more sophisticated investment strategies, but it does raise the question as to whether smaller balance SMSFs are executing appropriate investment strategies in the best interests of their members.

Some commentators have been prone to hyperventilate about whether SMSFs were being abused to load up unwitting investors with inappropriate assets. Residential property and SMSF loans (limited recourse borrower arrangements, or LRBAs) were the prime targets. As we have consistently argued, the numbers simply do not bear out these fears. Residential property started the period at a paltry 3.91% of SMSF assets and was just 4.35% by March 2017. LRBAs gradually built momentum after their introduction, but by March 2017 were just 3.97% of SMSF assets – a proportion which had been stable since mid-2015. It is probably not a surprise to any observer of the industry that these strategies have been most heavily adopted by the ‘mid-range’ SMSF funds – those in the fund size brackets of $200-500k up to $1-$2m.

Finally, it is worth noting that SMSFs are still not generally utilising professional managers for their investments. It could be argued that this is a logical consequence of the “DIY” spirit of the SMSF sector. On the other hand, the extremely low level of managed investment exposure does raise the prospect that some SMSF members could be exposing themselves to excessive risk, particularly in this low rate environment in which the ‘hunt for yield’ can lead to risky investment decisions. This assessment is made more likely by the fact that smaller funds, which would prima facie be expected to involve less experienced and sophisticated investors, have the lowest exposure to the various types of managed investments. By contrast, the largest SMSFs have a high exposure to this form of investment – an indication as to where the ‘smart money’ is funnelling its investment dollar.

Which Type of Fund is Better?

It is very difficult to compare the performance of the various types of superannuation fund. Each sector has points in its favour. Each has negatives. What is more, even the measurement of performance is controversial. APRA and ASIC collect different data and comparisons are very difficult. Raw performance statistics also do not take into account the different risk profiles of the underlying fund members.

Putting those difficulties to one side, has done some heavy lifting to compare the performance of SMSFs against large funds. It found that large funds have outperformed in recent years, but that SMSFs were consistently and materially better performance through the key years of the global financial crisis.

Investors should be aware of these outcomes, but also be careful about reading too much into them for many of the same reasons as discussed above in the context of industry vs retail funds. Infrastructure investments, for example, are more difficult to access in a cost-effective way for SMSFs and exposures are lower. What is more, the performance of an individual fund or SMSF will differ from the average and will be driven by a range of factors, including the underlying risk appetite and objectives of the member(s).

How Australia’s Superannuation/Pension System Compares to the Rest of the World

Given that the whole world is facing the challenge of aging populations, it is reasonable to ask how the Australian superannuation/pension system compares with those of other countries. The most respected analysis of this issue is conducted annually and crystallised in the Melbourne Mercer Global Pension Index. This index rates the adequacy, sustainability and integrity of pension systems in 27 countries across the world, provides a grade for each and an overall grade and ranking for each country. In 2016, Australia’s overall index value fell from 79.6 to 77.9 (a “B+”), putting it third in the world behind perennial leaders, Denmark and the Netherlands.

In its commentary on Australia, the Global Pension Index highlighted the following as areas for potential improvement:

  • introducing a requirement that part of the retirement benefit must be taken as an income stream;
  • increasing the labour force participation rate at older ages as life expectancies rise;
  • introducing a mechanism to increase the pension age as life expectancy continues to increase; and
  • increasing the minimum access age to receive benefits from private pension plans so that access to retirement benefits is restricted to no more than five years before the age pension eligibility age.


The Australian superannuation system is a story of enormous success. Successive governments have committed to a long term program designed to ease the pressure on government finances a generation into the future. But the challenges presented by aging populations have not yet been defeated. Refinements to the superannuation system continue to be debated. Should the level of contribution be increased to 15% of salaries, as originally planned when the Superannuation Guarantee was introduced? Should governments mandate income streams from superannuation as recommended by David Murray’s Financial System Inquiry? And what of the recent introduction of a $1.6 million cap on the amount of superannuation savings that can be transferred to a (tax-free) superannuation pension account. Is it fair? Does it strike the right balance?

These issues and many others will continue to be debated. However, before we go and tinker too much, we should also remember the importance of stability and certainty. Our superannuation system enjoys widespread support amongst Australians and it is critical that this support be maintained. After all, we are asking Australians to put aside 9.5% of their salaries every year into an account that they will be unable to access until they retire. This type of arrangement could very easily fall out of favour and continual tinkering with the rules and regulations around superannuation could well be the catalyst.

For investors, the imperative remains the same. The many SMSF investors in our $1.8 billion Credit Fund consistently report that capital stability and reliable income remain key imperatives. They want to avoid portfolio losses that can strike at the worst moments and be able to fund a comfortable lifestyle in retirement. And that, after all, should be the aim of any superannuation system.

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Copyright 2018 La Trobe Financial Services Pty Limited ACN 006 479 527. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and a general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content.