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Friday, December 8, 2023

Australians know how to save for retirement

When Canada’s Brookfield Asset Management came up with an offer to buy Australian energy company Origin Energy, it ran into resistance. Australia’s largest pension fund, AustralianSuper, blocked the Canadian investment giant’s bid, even though it was asking for 19.4 billion Australian dollars (11.6 billion euros). According to AustralianSuper, it was an undervalued business because it is key to the country’s transition to green energy.

Bloomberg reports that Australian pension funds they used to be relatively passive players. They rarely tried to change the businesses in which they invested. AustralianSuper is now proof that a fast-growing industry is ready to flex its muscles in global finance.

1. Why are Australian superannuation funds getting stronger?

Australia’s pension system has the fifth largest retirement savings fund in the world at A$3.5 trillion (€2.1 trillion) and is growing faster than any other country. There was a wave of mergers and some larger funds gobbled up smaller, underperforming rivals, gaining more leverage. AustralianSuper’s move against the Origin takeover is seen as a turning point. Retaining its stake in Origin would help AustralianSuper meet its commitment to net zero carbon across its investment portfolio by 2050.

2. What is behind the superannuation boom in Australia?

The funds have been expanding since 1992, when the government introduced a self-funded pension scheme to reduce dependence on the government pension system. Employers must contribute part of the employee’s salary to their pension. This part increased from three percent in 1992 to the current 11 percent, and in 2025 it should reach 12 percent. The money is then invested in local and foreign capital markets. Thanks to the returns, people have the opportunity to increase their retirement savings – currently averaging around eight percent per year. There are now 24 million superannuation accounts in Australia.

3. How does the system work?

Australia’s system is very much a ‘defined contribution’, meaning the amount saved is invested in a pension, rather than a ‘defined benefit’, which is calculated based on factors such as final salary when you leave work. Many countries such as the UK and US still use defined benefits but are moving towards defined contributions. Australia’s biggest funds such as AustralianSuper and Cbus Super have a lot of support in the union movement. Most of them were set up for specific industries such as construction, healthcare or hospitality, but are now open to anyone. Apart from these, there are retail pension funds, usually run by banks or asset managers with the aim of making a profit, and a small number of corporate and government funds. Some even manage their retirement savings themselves in their own fund. There is still a government pension scheme which acts as a safety net for people who don’t save enough to fund their retirement.

4. What are the prospects for this industry?

Employer contributions rose 12.9 percent this year to June to A$122.5 billion (€73.5 billion) and pension fund assets are expected to triple by 2040. This growth is changing the shape of the Australian economy and its capital markets. While the national pension funds of Japan, Norway and South Korea are the largest in terms of volume on the planet, AustralianSuper is among the top 20 performers. The ratio of pension assets to GDP in Australia is 124 per cent and is projected to reach almost 250 per cent by 2060.

Don’t overlook

The state does not have pensions for the thirteenth for a simple reason. Most employees do not have a thirteenth salary


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