Union-aligned superannuation funds are forecast to own nearly two-thirds of the Australian sharemarket within 20 years, by which time they could appoint their own directors to company boards, Deloitte says.
Deloitte modelling shows the super system will climb from $2.7 trillion today to more than $10 trillion over the next 20 years. By then, a smaller number of mega funds will own 60 per cent of ASX.
The power of super – particularly the industry and public sector funds – as investors was on show earlier this week when they were key players in the demise of Westpac chief executive Brian Hartzer.
“Many funds are seeing their role as an informed investor representing large sections of the workforce to make company directors and executives more accountable for their decisions,” Deloitte superannuation partner Russell Mason said.
“We see this trend increasing over the coming years and the likely move to funds taking board positions where they have significant shareholdings.”
Industry super funds, which are jointly run by unions and employers, reached another major milestone this week, overtaking self-managed super in the September quarter to take the mantle as the biggest players in the $2.9 trillion retirement savings system.
Australian Prudential Regulation Authority figures for the September quarter show roll-ins to the industry sector climbed by another $4.5 billion.
As a result, industry fund assets have reached $747.4 billion, nudging ahead of self-managed super at $746.2 billion.
“What we are seeing can be attributed to industry funds’ superior investment performance year in and year out, and the member first ethos that drives everything we do,” Industry Super Australia chief executive Bernie Dean said.
“The growth we are seeing is two-fold – we’re continuing to see consumers voting with their feet out the other side of the Royal Commission, but we’re also seeing a shift among those more informed members who are looking at the long-term performance of industry funds and making decisions to switch.”
Mr Mason said the shareholdings of some super funds will become so large that they would seek to take board positions.
“Currently the total investment by superannuation funds in Australian shares comprises around 35 per cent of the total market capitalisation of the ASX,” he said.
“If they retain the same percentage allocation, this will increase to more than 60 per cent by 2038 – almost double the current allocation – and so dominate the ASX’s holdings.
“A key issue will be whether there will be enough capacity in the ASX to support this level of demand from superannuation funds, given that there are also individuals and companies seeking to invest non-superannuation monies.”
Deloitte forecasts the industry and self-managed super sectors will grow in lock step over the next two decades, with each having a 29 per cent market share in 2038.
“Our projections indicate that the industry funds will grow strongly such that they will be on par with SMSFs as the largest market segments in coming years, with each verging on $3 trillion in assets by 2038,” the report says.
Deloitte actuary Diane Somerville said the super system would grow by a whopping 257 per cent over the next two decades, based on an assumption compulsory super would move to 12 per cent of wages by 2025 as scheduled.
Growth might, however, be slower if “lower for longer” predictions are right.
“If retirees are forced to draw down greater than expected proportions of their retirement savings to meet their needs in a low-return environment, then the projected asset growth to more than $10 trillion by 2038 would slow, and commensurately, the call on the government for the age pension would be greater,” she said.
The report identifies three potential consequences of large ASX holdings by super funds.
Given the high level of demand, domestic shares could become over-priced.
Funds may also increasingly form consortiums that take whole companies private.
And third, super funds may need to make increased use of synthetic investments such as options contracts to simulate the returns on the actual shares if they cannot hold the actual stock itself.
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