Between BlackRock’s Larry Fink and UK Chancellor Jeremy Hunt, it's official: Australia’s A$3.7 trillion ($2.4 trillion) retirement system is the envy of the wealthy world.
In his budget speech to Parliament in March, Hunt cited Australia’s private pensions, known as super funds, as delivering “better returns for pension savers with more effective investment strategies.” Three weeks later, in his annual letter to investors, BlackRock’s Chief Executive Officer directed American policymakers to “study and build on” Australia’s model, suggesting it could be an antidote to the deeply stressed US Social Security system.
Australians have become some of the world’s wealthiest retirement savers in large part because the law that created the super funds also established a steady source of funding: Employers are required to make contributions equivalent to 11% of workers’ salaries. There’s no such requirement in the US and the UK only recently made some minimum contributions compulsory.
But in a sign of the enormity of the looming global retirement crisis, even Australia’s enviable pile of cash won’t completely sustain the country’s aging population. After 32 years of mandatory employer funding, almost two-thirds of younger 60-somethings’ accounts had less than A$200,000 at the end of 2023. There’s very little guidance about how to stretch that money over three more decades, or what to do when it almost inevitably runs out.
“It used to be: you would save money, we would invest it and send you a check and say, ‘all the very best’—well, that’s not how retirement works,” said Paul Schroder, CEO of the A$330 billion AustralianSuper, the country’s largest fund. “We would claim that we’re world-class on the saving side and the investment side, but we’re only half done, maybe not even, on the spending side.”
This is still a half-full glass compared with other developed economies, where pensions are straining to meet their obligations and individuals have limited personal savings. America’s 70 million baby boomers will be past retirement age by the end of 2031. Social security is expected to exhaust its reserves three years later. Working longer or delaying pension benefits is one obvious way to ease the stress on the public coffers, but doing so triggered violent protests in France; opposition scuttled similar reforms in Ireland and Canada.
With government support looking shakier than ever, the financial services industry has stepped in. Retirement investing has become a tremendous business, especially for BlackRock, one of the biggest managers in the $38 trillion US market. Unlike retail accounts, retirement money is sticky. Account holders typically can’t access it without penalty before a certain age.
But left to their own devices, many workers don’t set money aside—or if they do, it’s not nearly enough. The UK only recently made minimum contributions compulsory at a level of 5% of salary from employers, plus 3% from workers. In the US, it’s optional for all parties, though within the last 15 years employers have been given more freedom to divert some of workers’ money into retirement investments.
Australia’s high, compulsory rates have fueled the funds’ rapid growth, drawing global asset managers and piquing the curiosity of policymakers and regulators around the world.
“It’s a chance for us to look into the future, really,” said Neil Bull, Interim Director of Market Oversight at The Pensions Regulator, a UK agency tasked with overseeing work-based pension schemes in that country’s retirement system. The UK is roughly 20 years behind Australia in its move to make contributions compulsory, he said, but “fundamentally I think we’re really trying to do very similar things.”
Australia’s now-celebrated retirement system—officially, the Superannuation Guarantee—was codified in 1992, after contentious wage negotiations between the country’s biggest unions and employers. The new laws required all employers to make contributions to workers’ retirement accounts, starting at the equivalent of 3% of salaries in the first year and growing steadily. Today employees get 11% deposited into their accounts. That sum is scheduled to rise to 11.5% in July and top out at 12% next year.
It’s the super funds that administer the vast majority of those accounts, offering mainly pre-mixed portfolios pegged to risk tolerance and projected retirement dates. In the private sector, workers choose their investments—most stick with whatever is the default—and can change their super provider at any time, whether or not they change jobs.
Inflows from paychecks now exceed A$2 billion per week. Total industry assets are expected to hit A$13.6 trillion by 2048. Seven Australian pensions now rank among the world’s 100 largest institutional investors. AustralianSuper manages more money than the nation’s sovereign wealth fund.
This has made Australia fertile hunting ground for global asset managers, especially as the super funds have grown to more than what the country’s markets can absorb. The A$82 billion HESTA uses dozens of investment companies to run different tranches of its portfolios; its international strategies are shared by Citigroup Global Markets, BlackRock, Pacific Investment Management Co., JPMorgan Asset Management and others.
Increasingly, the super funds are looking to private markets, eager to participate in dealmaking. As global firms have established offices in Australia, so have the super funds built teams in London, New York and Beijing, to be closer to opportunities as they arise.
They’re also buying illiquid and non-traditional assets. Originally set up for construction workers, the A$90 billion Cbus has amassed a vast portfolio of real estate, some of it showcased in miniature in the foyer of its Melbourne headquarters. The fund has returned 8.9% per year net of taxes and fees since its 1984 inception, roughly on par with the domestic market.
“It’s been very strong returns for members over multiple decades,” Cbus Chief Investment Officer Brett Chatfield said. “Clearly that’s part of why the Australian superannuation system is seen as a bit of the envy of the rest of the world.”
Not every super fund does quite as well by its investors. The Australian Prudential Regulation Authority has introduced an annual performance test to weed out lagging funds. If investment products don’t meet the regulator’s standard, the super fund must tell investors. Those that fail two years in a row can’t accept new accounts.
The same reforms have also helped to drive down fees, but for asset managers, they still represent a good stream of revenue. Australians paid about A$3.9 billion in investment fees in the 12 months ending June 2023, or around 0.1% on the rapidly growing pool.
All developed economies are bracing for the coming wave of baby boomer retirements. The demographic shift will be the biggest test yet for Australia’s vaunted pension system. As millions exit the workforce in the next decade, they will gain access to around A$750 billion in super fund investments—almost a quarter of the value of the current system.
There’s little precedent for how those retirees might draw on their accounts. They’re eligible for the full amount as they reach so-called preservation age, which is based on year of birth. It’s not uncommon for people to tap their funds as soon as they can, whether to pay off debt or to fund, say, a bucket-list trip.
“If people want to take all their money out on the first day of retirement and buy a Lamborghini with it, they can do that,” said David Knox, Senior Partner at Mercer and lead author of the Mercer CFA Institute Global Pension Index. “If they want to buy a 100% indexed annuity, they can do that. We are leaving a lot of choice to the retiree. There’s no guardrails, there’s no guidance on what people should do.”
Australian regulators say the super funds aren’t doing enough to help retirees turn their savings into income, or to educate them about how long their balances might last. Even for well-situated workers, it’s hardly a windfall: A 64-year-old man earning A$100,000 a year with a super balance of $400,000 could expect to draw around A$56,000 per year starting at age 67, including the supplement from the public, means-tested “age pension.” And most sixtysomethings have far less.
“It’s clearly not enough,” said Sarah Abood, chief executive officer of the Financial Advice Association Australia. Future workers should have bigger super balances, she said, because they’ll benefit from higher rates of contributions over longer stretches of time. But for now, most retirees will still lean on the age pension. Their super funds will “help with many of the things you tend to need at retirement, replacing cars and a bit of travel, that sort of thing. But it’s not going to generate a large income for life.”
With persistent anxiety over how to make that money last, the nation has a shortage of financial advisors. Regulations brought in after a royal commission into the banking and finance sector five years ago have changed the qualifications people need to become a financial adviser. The government has announced a range of proposed reforms for the sector.
“This area is ripe for a bit of reform,” said Mary Delahunty, chief executive officer of the Association of Superannuation Funds of Australia. The need is even greater for gig workers and women, she said, “for whom working life doesn’t quite look like the average man with long tenure.”
Providing sufficient retirement income was only one part of the original goal of the Superannuation Guarantee. Relieving stress on the government-funded age pension was the other, and in this, it’s been a resounding success. A 2023 government report found that despite the aging population, spending on pensions is projected to fall from 2.3% to 2% of GDP within 40 years, as superannuation increasingly funds retirements.
“The developed world is aging, people are living longer and healthier lives. They’ve also got higher expectations,” said AustralianSuper’s Schroder. “The only time to provide for that was 30 years ago.”
Some US officials were looking to the Australian system before Fink’s recent recommendation. Americans, Schroder says, are preoccupied by environmental, social and governance guidelines, what the funds will or won’t invest in, and the collaboration between business and the unions. And everyone is interested to learn that, in Australia, individuals are ultimately at the mercy of the markets, for good and for ill.
“They’re really interested in the fact that it’s not contentious. They love the fact that there’s no direct role for government,” Schroder said. “We’ve all got a lot to learn and lots to do. But there’s not that many things Australia is world-class good at: Mining, swimming, and superannuation.”
This article was provided by Bloomberg News.