Is Australia’s superannuation system world’s “most successful”?

A new study by the global Thinking Ahead Institute has ranked Australia’s compulsory superannuation system the world’s most successful following 11.3% compound growth in assets under management over the 20 years to 2020:

The most successful pensions market can be found in Australia, featuring 20-year pension asset growth of 11.3% per annum, in USD terms. The critical features in this success have been government-mandated pension contributions, a competitive institutional model and the dominance of DC [Defined Constribution].

This strong growth has lifted the value of Australia’s assets under management from 112% of GDP in 2010 to an estimated 175% of GDP in 2020:

I don’t put much weight in this “most successful” claim. The primary reason why Australia’s superannuation assets have grown so strongly is that the federal government mandates that workers must put 9.5% of their wages/salaries into superannuation.

If the federal government mandated that workers purchase a massage every week, then Australia would very likely have the “most successful” massage industry in the world as well.

A better way to examine the efficiency of Australia’s superannuation system is to look at fees. Here, Australia’s compulsory superannuation system compares poorly against other nations with management fees among the very highest in the world despite having one of the biggest pools of assets under management:

ScreenHunter_3313 Jul. 15 13.06

Hence, Australia’s superannuation system defies the notion of ‘economies of scale’. As superannuation assets have grown, management fees should shrunken proportionately.

To add further insult to injury, the Grattan Institute has illustrated that Australia’s compulsory superannuation system has become less efficient as it has ballooned in size:

ScreenHunter_2943 Jun. 23 15.52

The end result is that Australian households are being gouged with fees, paying twice as much in super management fees than they spend on electricity every year.

In short, the ever-growing honey pot of fees available under Australia’s compulsory super system has created a giant parasitic industry.

If there’s one thing Australia’s superannuation system is world’s “most successful” at, it is milking workers for fees.

Unconventional Economist
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Comments

  1. Our Aussie Super system is one of the few sources that invests in Australia, that point is indisputable.
    Without Super we would have dramatically reduced investment in industries like Iron Ore. We’re a global power house in Iron Ore and that fact delivers first world geopolitical significance to our third rate Politicians.
    What’s also indisputable is that Aussie Super investments are the driving force behind the decline in the value of our collective Aussie human capital and the estrangement of our traditional allies.
    If a nations real wealth is a measure of its capabilities (human, capital, political and geopolitical) than Aussie super is undoubtedly the greatest wealth destroying mechanism that any society has ever invented.
    So is it “Successful” ?
    I guess that depends on how you measure success.
    But on a more important point, Did you see the Auction results for last weekend?

    • “Our Aussie Super system is one of the few sources that invests in Australia, that point is indisputable.”

      I am disputing!

      https://citizensparty.org.au/whos-buying-australia-oh-canada

      “Australia has just $113 billion of the national $3 trillion pool of super invested in local infrastructure, yet we invest $700 billion in infrastructure around the world”

      The Public Sector Pension Investment Board (PSP Investments), which manages pension funds for Canada’s federal public servants, is the single biggest investor in Australian agriculture “with a land and water portfolio valued at more than $3 billion”

      • Hmmm Foreigners owning large portions of our best Agriculture land and the rights to a significant portion of the available water. That does not strike me as something one would call an “investment” in Australia.
        Are they somehow improving the land or creating more water?
        Are they introducing new Agriculture methods and thereby increasing the value of the asset that they have purchased, or the labour that we supply (in support thereof)?
        This is not an Investment

        • If you look at investing as putting $X into something and getting $X+lots in return then this is an investment… GDP only cares about money changing hands so its good for the economy as its $X+$X+lots of money changing hands….

          • I hear what you’re saying, it’s all very conventional and awfully convenient, but I will stick with my own definition of Investment.
            Investment in my mind suggest deliberate focused efforts the goal of which is to increase the value of our Capital base. This can take the form of increasing the value of our Physical, Social, Human or Political capital. If all we wanted was more money than surely it would be easier to just run the printing presses until our lust for money was satiated.

    • Strange EconomicsMEMBER

      They are investing – those 400K a year salaries to just buy CBA and BHP shares (brilliant decision! pat on the back) are necessary to support the 3 million dollar mortgages for a harbour suburb house for the family.
      Don’t think they can get by on 600 a fortnight jobseeker if they didnt have a honeypot to cream 2 % off.

  2. I am pretty sure if you put $2Trillion into the stock market your going to see the market rise by $3T just due to the perceptions that there is a lot of investment happening… Does not mean that there is any good management behind the investments..

  3. Hardly a compelling presentation based simply round management fees hence, superannuation should be avoided?

    Like elsewhere there is sub-optimal and/or no analysis of demographic change i.e. ageing population and subsequent dependency ratios for the state pension system i.e. permanent population working age declining in proportion to numbers of retirees which would put stress on both budgets and need for increased taxes.

    Australia’s ‘retirement income’ system generally comes in the top five internationally while MB, the LNP, IPA, banks, NewsCorp etc. complain about non-profit industry and/or independent super funds, or generous tax treatment of wealthy (assuming settings would stay the same), therefore a desire to crash the system leaving retail super (who charge/clip the highest fees?); US radical right libertarian socio-economics for employees and state socialism for employers and corporate entities, using the ‘owned’ LNP government as delivery system.

  4. Say it aint so.

    Superannuation fees fall as funds merge and members get wise
    https://thenewdaily.com.au/finance/superannuation/2021/02/23/superannuation-mergers-falling-fees/

    “It is clear that in superannuation size matters,” he said.

    “Responsible super funds are looking to find merger partners so they can pass efficiency gains on to members in the form of lower fees.”

    Across the board, direct costs charged to members by super funds have declined in most areas. Members were charged $8.48 billion in fees in the year to June 2020, compared to $8.85 billion back in 2015.

    That is a decline of 4.6 per cent, during a period in which super funds’ assets under management rose 56 per cent to $1.93 trillion.

    Costs per dollar invested therefore fell by far more than 4.6 per cent.

    That’s Industry funds. The for profit funds are the ripoffs lifting the overall (Chart 4.1) fees charged. And insurers. What are MB / NW fees again?

    The end result is that Australian households are being gouged with fees, paying twice as much in super management fees than they spend on electricity every year.

    Relevance? You might ask how much more it is than they spend on bananas! Or anything. Freedom Boy’s wonky/dodgy financial reckoning re super has begun to rub off on Leigh in the house economics committee. Leigh has made other dodgy super statements lately, eg., https://thenewdaily.com.au/finance/superannuation/2021/02/03/future-and-verve-super/

    Also from that “cost twice as much” aaptfactcheck link:
    RiceWarner’s Superannuation Fees Analysis 2018 found Australians spent $22.4 billion on superannuation fees for the year ended June 30, 2017. The group’s analysis also found there had been a 27 per cent fee reduction over 15 years. “The whole industry is run at a cost less than the combined annual profits of the four big banks,” the report said.