Superannuation's $3 trillion COVID cost

Published on
July 24, 2020
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Superannuation's $3 trillion COVID cost

COVID-19 will cost Australia's superannuation industry $3 trillion in foregone growth by 2040.

Prior to COVID-19 Australia's superannuation savings were projected to climb to $10 trillion over the next two decades, but COVID-19 has seen this figure revised down to $7 trillion, according to Rainmaker Information.

This assessment is based on results from its Superannuation Projection Model that compared two strategic scenarios: pre-pandemic growth expectations with post-pandemic expectations.

This modelling factored in Australia's recession, rising unemployment, lowering superannuation contribution levels, lower long-run super fund earnings expectations and reduced population growth.

About half of Australia's population growth is driven by net immigration and this is highly likely to be impacted by international border closures and travel restrictions. The longer this impact lasts the bigger the dampening effect on Australia's economic growth.

"This lower projected outlook for superannuation savings outlook could have significant economic consequences on Australia if it is not carefully managed," said Alex Dunnin, executive director of research and compliance at Rainmaker Information.

"Super funds are major investors into Australia's economy with their investments spanning infrastructure, property, purchase of government bonds, company shares, agribusiness, seeding start-ups and energy projects. Three trillion dollars less in available capital could have major ramifications."

Dunnin said that superannuation will however remain a massive pool of savings available to boost retirement living standards and help the nation's economy for decades to come.

The release of Rainmaker's latest superannuation projections come after the announcement that almost $30 billion has already been withdrawn by distressed super fund members as part of the Early Release of Super scheme.

On top of this, the Rainmaker MySuper performance index is expected to show that 2019-20 delivered average returns of -0.7%, the lowest returns since the Global Financial Crisis.

Super projections and the COVID-19 effect

Despite the slower than expected long term growth in superannuation savings in coming decades, Rainmaker still expects the major long-evident strategic shifts in superannuation to continue.

These industrial shifts include; the continued increase in dominance of not for profit (NFP) super over retail and self-managed super as well as the proportion of superannuation savings owned by retirees will continue to rise.

Superannuation segments 2000-2039

These segment shifts are expected to result in the NFP super fund segment becoming the major channel for retirement savings.

"The contracting role of retail offerings in proportional terms is a transition that could fundamentally reset Australia's superannuation sector, wealth management and financial advice marketplace," said Dunnin.

"We are already seeing this playout with these sectors working hard to become much more efficient, lower their fees, develop new lines of business, new channels and platforms".

"While retirees currently own about 30% of all superannuation savings, by 2040 they could own up to 44% of it. Rainmaker projects the share of retirement savings managed by each segment to change profoundly," said Dunnin.

"This will fuel pressure for continued reform of Australia's superannuation policy", he added.

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