23 March 2023

Super funds are ready to take on the world

With the right approach, an international mindset can provide superannuation funds the opportunity to deliver solid returns for their members.

Having lived and worked overseas for many years, I have often been surprised to find that some of the best things about Australia have a low profile outside this country.

Of course, everyone recognises the Sydney Opera House but talk about the AFL and you are likely to be met with blank looks.

Until recently, I would have put the superannuation industry on that list, too. Australia’s A$3.4 trillion (US$2.24 trillion) of retirement savings represent the world’s fourth-biggest pension pot, yet the institutions that manage these assets have maintained a much lower international profile than many other major asset owners.

This is now changing – and fast.

As the savings pool grows and the industry consolidates, Australian superannuation funds are on the fast track to becoming some of the world’s biggest asset owners. To capitalise on this opportunity, they will need to take on a new range of risks, such as those related to currency, interest rates and geopolitics. And they will need international expertise and access to a new range of cross-border services.

Super funds need to approach this internationalisation carefully, but the strength of the Australian superannuation industry means they can be confident that they are making the right move at the right time.

Outgrowing the domestic market

There are good reasons for this internationalisation. Put simply, there won’t be enough assets available for the super fund sector – which has grown more than 20-fold from A$148 billion in 1992 – to buy in its home market.

Superannuation assets today already exceed the A$2.5 trillion total market value of all companies listed on the ASX, and are set to reach A$8.6 trillion by 2040, forecast KPMG last year.

This raises serious issues of concentration risk for the funds and their members – not to mention the potential for mass delistings as other investors are squeezed out.

And when it comes to allocating overseas, the size of Australia’s superannuation industry is a major strength. Its funds have the resources they need to unearth new opportunities, as well as the clout they need to compete for international assets. Accordingly, the bigger players are setting out bold plans to step up direct overseas investments, reducing the fees they pay to international fund managers.

In just the most recent example, Aware Super in February appointed its first head of international to set up a European office. AustralianSuper plans to add more than 200 people across its London and New York offices in the next two to three years, its investment chief said in March.

The next steps

We see this growing international mindset and the move into self-managed overseas investments as a logical next step.

It is no accident that this evolution reflects the successful models of certain other big, sophisticated and long-term investors. They include the large Canadian public pension plans, and sovereign wealth funds like Abu Dhabi Investment Authority, Norway’s Norges Bank Investment Management and Singapore’s GIC.

The Canadian model, in particular, has shown that investing in the infrastructure needed to build and maintain a global portfolio of long-term assets can produce positive returns for pension holders.

Indeed, executives from Aware Super and Cbus have said they are open to acquiring asset management firms, as their Canadian peers have done. Doing so would automatically give them a foothold and expertise on the ground in certain markets.

World-class institutions

Meanwhile, the pressure on Australia’s pensions industry to consolidate is also supporting the industry’s internationalisation.

As funds increasingly turn to mergers to achieve greater economies of scale, the bigger superannuation funds will be better able to provide their members with access to bigger opportunities in the global markets. Ultimately, big and well-resourced institutions can better afford to establish and staff overseas branches, create more diverse and international product offerings, and deliver superior retirement outcomes.

In short, Australia’s superannuation funds will soon find themselves competing for assets with major pension and sovereign wealth funds. It’s a contest that will bring these institutions into the global spotlight – and it’s a contest they can win.

By Antony Shaw, Chief Executive Officer of HSBC Bank Australia