Super funds and banks: partnering for the future

Tapping into a giant retirement savings pool.

By

The banking and superannuation systems have much in common. Both play a significant role providing a stable financial system. Both have unwavering duties to depositors and members; banks have a duty to keep depositors’ money safe; superannuation funds are committed to providing safety in retirement.

Both industries are evolving as they meet the needs of changing demographics and new customer groups and preferences as well as developing new channels and platforms that technological advances bring. Both industries are impacted by significant structural change. Specifically, three of the major banks have divested or plan to divest their wealth arms and significant mergers have taken place across the superannuation sectors with the number of both retail and industry funds declining by 64% and 76% respectively over the past 20 years¹.

What of the future? How will our paths diverge and where will our paths become increasingly intertwined? One area where our paths will likely diverge is the level of asset growth. Super funds will continue on their growth trajectory with some estimates projecting assets of A$10 trillion by 2037. The banking sector, on the other hand, is not expected to enjoy four-fold asset growth during this period. Banks are also increasingly capital constrained with superannuation funds having the opposite problem. Where will this capital be deployed and how can we play a role?

Diversification of asset classes

For a variety of reasons including liquidity needs, tax benefits and historical preference, Australian superannuation funds have been heavily tilted towards equities (including international equities) and have been somewhat underweight in other asset classes such as infrastructure.

According to the superannuation industry group ASFA, asset allocation to infrastructure by funds exceeding four members is just 5% of total assets. However, the growth rate of different asset classes tells a more nuanced story both domestically and offshore. Growth rates have been particularly strong in both international unlisted infrastructure and listed infrastructure with international infrastructure multiplying by more than 5.5 times and listed infrastructure growing by almost 3 times during that period. We expect this trend to continue as funds look to deploy their growing pools of capital and at the same time, the global infrastructure pipeline remains strong, driven by factors such as urbanisation, population growth, replacement of ageing assets in developed markets, and the transition to a low carbon economy.

Domestically and offshore, NAB plays an important role facilitating infrastructure by providing capital and financing solutions across the infrastructure delivery continuum– including the participants, the projects themselves and the investors. Domestically, we have long been an infrastructure leader and expect to continue to bring infrastructure opportunities to fund clients. As domestic fund investors expand into offshore markets, we can support the cross-border flow of capital through our global infrastructure footprint.

Significant growth to come

As a sector, Australia’s superannuation industry is truly moving Australia forward and is fundamental to the creation of strong economic and social and environmental outcomes for Australia. At A$2.7 trillion, the Australian retirement savings pool is one of the largest in the world.

To put this in perspective, whilst this savings pool is the world’s 4th largest, Australia is the 13th largest by GDP and only the 54th largest by population size. And there is still significant growth to come. The pool is growing circa 7% p.a and is expected to increase almost four-fold over the next 20 years to $10 trillion². The growing size of the pool is expected to eclipse the $4.6 trillion banking sector within the next 10 years.

The sector has led to an improvement in Australia’s national savings and helps contributes to Australia’s long term fiscal strength, including the implications of an ageing demographic. Public spending on pensions is relatively low at 4% of GDP, comparing favourably to the OECD average and countries such as the US and France at 7% and 14% respectively³.

In addition, superannuation has led to improvements in equity across socio-economic groups, moving beyond specific industries, professions and gender groups. In 1974, just 32% of wage and salary earners were covered by superannuation, representing just 41% of male workers and 17% of females according to the industry body ASFA.

 

1. ASFA Research and Resource Centre
2. Rainmaker Roundup: Superannuation Projections 2017 to 2037
3. The Economist

This article was first published in 2019 Outlook Creating Opportunities. Read more articles from the magazine.

Speak to a specialist