The $12 trillion force reshaping the Australian economy

“The most powerful force in the Universe is compound interest” is a quote often attributed to Albert Einstein. 

While the saying is almost certainly apocryphal, it certainly rings true. You only need to look at Australia’s superannuation system for proof. 

What started as a compulsory retirement savings scheme designed to ease the fiscal burdens of the Age Pension on Australian taxpayers has become a globally significant pool of capital in excess of $4.5 trillion.

While the system has benefited from successive increases to the superannuation guarantee contribution rate since 1992, years of compounding returns mean it is now the fourth-largest retirement savings ecosystem in the world and is projected to climb a few rungs further up the ladder in the coming years.

Once a retirement savings scheme, now an economic powerhouse

According to the 12th edition of Deloitte’s Dynamics of the Superannuation System report, Australia’s total superannuation assets are projected to more than triple to $12.4 trillion by 2045 while the number of funds is continuing to decrease due to ongoing industry consolidation.

The end result is expected to be a $12 trillion asset pool controlled primarily by ten or so mega-funds that have a fiduciary obligation to act in their members’ best financial interests in order to help fund their retirement. 

This has several implications for the Australian economy, the first being how this pool of capital influences our future economic development. 

Depending on the methodology used, the total net value of all superannuation assets first surpassed the total market capitalisation of Australia’s primary equities market – the Australian Securities Exchange (ASX) – in 2020. 

By 2045, we project the superannuation system will be worth around 180 per cent of Australia’s entire economy. Its investment decisions will help shape the future direction of Australia’s economic development and continue to provide a major source of capital for nationally and globally significant infrastructure projects.

For example, the total investment by superannuation funds in Australian listed shares comprises just over 36 per cent of the total market capitalisation of the ASX. If funds maintain their current proportionate allocation to Australian equities, funds could own close to half of the ASX by 2045, depending on future market growth and capital flows.

This level of capital inflow will help provide extra liquidity to Australian equity markets, helping Australian companies grow. Equally, it could also result in the outright acquisition of formerly listed companies, reducing retail investment opportunities.

These trends underscore the fact that the superannuation system is outgrowing the domestic equities market, creating the need for alternative investments both to reduce overexposure and to access more diverse investment opportunities. 

Already we are seeing funds look for alternative investment opportunities, be it foreign equity markets, infrastructure, or private markets. 

As Deloitte Access Economics Partner John O’Mahoney wrote in a recent academic paper, superannuation funds’ forays abroad are driving an increase in Australia’s net international investment position in a way that could materially boost our gross national income and standard of living beyond current projections. 

The growing pool of capital also becomes a political question: can we or should we use it for nation building? Already we have seen discussion on how superannuation funds can help finance housing construction or the green energy transition and whether such actions conflict or align with funds’ mandate to act in their members’ best financial interest. 

The biggest corporate owner

Similar questions are also being asked from a governance perspective as superannuation funds grow their share of total financial system assets. As funds increase their ownership of the ASX, will they begin to seek greater board representation or otherwise become more active?

Invariably, the need to act in their members’ best financial interests will sit alongside how their members expect them to act as corporate citizens, particularly among funds that market themselves as conscious of environmental, social and governance (ESG) issues. This is not just a growing community expectation. The regulators are increasingly focused on ensuring that funds adhere to the public promises they make to members in relation to the assets they manage on their behalf.

Traditional investors do not feel this consideration as keenly. Arguably as a result of the compulsory nature of our system, the ‘good corporate citizen’ bar is higher for superannuation funds. As their ownership of the ASX grows, there is an opportunity for superannuation funds to set the governance standards for everyone.

The emergence of a small number of mega-funds managing hundreds of billions of dollars, and eventually trillions, also raises governance questions within the superannuation sector itself. As funds increasingly become some of the largest owners of Australian and global assets, trustees will oversee organisations with extraordinary economic influence.

Ensuring boards possess the skills, independence and governance frameworks necessary to manage these responsibilities effectively will become an important focus for regulators, policymakers, parliamentary inquiries and members alike.

Governance questions also surround funds’ growing investments in the private markets. Regulators are watching this shift closely; APRA and ASIC have sharpened their focus on the risks associated with private assets, especially in relation to valuations.

Superannuation funds and other institutional investors will need the right expertise and governance, valuation and risk management frameworks to manage the particular requirements of such investments.

Traditional risk measures can also be misleading in illiquid markets. Infrequent pricing can make private assets appear less volatile than they are, potentially understating economic risk and overstating the benefits of diversification. Liquidity is also an often-misunderstood aspect of private assets.

As allocations to private assets grow, funds will face increasingly complex questions about valuation governance and member equity. Unlike listed securities, many private assets are not priced continuously by a market. Their valuation depends on models, assumptions and professional judgement. While such approaches are well established in many instances, they place greater importance on independent valuation processes, robust governance frameworks and regular challenge of the underlying assumptions.

Liquidity management will become equally important. While superannuation is often viewed as a long-term investment system, funds must still meet benefit payments, pension drawdowns, member switching and transfers between investment options. Liquidity management will become even more important as a greater proportion of members retire with larger balances and begin drawing regular pension payments from the system.

During periods of market stress, trustees may need to balance the interests of exiting members and remaining members, particularly when significant portions of the portfolio cannot be readily traded. This places a premium on sophisticated liquidity stress testing, careful portfolio construction and governance frameworks that ensure all members are treated fairly.

As private market exposures continue to increase, regulators will inevitably scrutinise not only investment outcomes, but also the governance processes used to determine valuations, manage liquidity and allocate risks between different groups of members. The resulting expectations are likely to shape industry practice for decades to come.

With Australians’ retirement savings on the line, the stakes are high. Not only will superannuation funds help power the growth of private markets in Australia and overseas, but they will also likely contribute to their increased scrutiny. The challenge is no longer simply whether superannuation funds should invest in private markets, but whether the governance frameworks supporting valuations, liquidity and risk management can evolve quickly enough to match the scale of the capital being deployed.

The shift to retirement

One final way the superannuation system will shape Australia’s economy is through the emergence of a substantial retirement industry as funds transition from helping Australians accumulate retirement savings to helping them draw them down. 

As the system matures and retirement balances increase, decisions made by older Australians will increasingly influence patterns of consumption, housing, aged care funding, financial advice and reliance on the Age Pension. These choices will, in turn, affect how superannuation funds invest retirement savings, placing greater emphasis on cash flows, liquidity management and income generation.

Retirement itself will become a larger and more significant sector of the economy. Superannuation funds will play a central role in its development, extending their reach beyond wealth accumulation and investment management. Over the next two decades, the effects of the superannuation system are likely to be felt across the broader economy, shaping capital markets, corporate governance, housing and aged care financing, and the flow of investment throughout Australia.

What began as a retirement savings policy has evolved into one of the country's most influential economic institutions. Its future development will help determine not only how Australians retire, but also how the nation invests, grows and prospers.