![Hats off: Australia's compulsory superannuation system is rated among the world's best.](http://web.archive.org./web/20170609234343/http://www.afr.com/content/dam/images/g/w/5/5/8/n/image.related.afrArticleLead.620x350.gwk6zx.png/1496718187713.jpg)
This content is produced by The Australian Financial Review in commercial partnership with Mercer.
Retirement funding is definitely a global area in which Australia punches well above its weight.
The country's compulsory superannuation system, which currently ensures that employers must pay 9.5 per cent of an employee's wages into a retirement fund – scheduled to increase to 12 per cent of earnings by 2025 – has been the major contributor to the growth of a $2.2 trillion retirement kitty, which stands at 130 per cent of Australia's gross domestic product (GDP).
According to David Knox, senior partner and senior actuary at wealth and retirement consultancy Mercer, the Australian system is the best in the English-speaking world; and in global terms, ranks at number three. In Mercer's Melbourne Global Pension Index, only the retirement income systems of Denmark and the Netherlands rank ahead of Australia's.
"Many policymakers around the world look at the Australian system with envy," says Knox. "There are some things we could do better – for example, we still have self-employed people slipping through the cracks – but in general the strength of our system is its broad coverage, and the fact that we have a superannuation guarantee (SG) of 9.5 per cent of wages, which is planned to move to 12 per cent."
The growth of the Australian system is poised to be even more spectacular. Alex Dunnin, head of research at financial services research firm Rainmaker, projects superannuation assets to increase by 7 per cent a year to 2036, propelled by the core drivers of population growth, net contributions, the shift to income stream benefit payments (which retains capital in the system for longer), and net earnings.
Such growth would see the super system quadruple in size, to reach almost $9 trillion, expanding to become almost triple the size of the Australian economy.
At some point in the future, the system will tip into net drawdown, but that point is some way off.
In 2015-16, says Rainmaker, total contributions were $137 billion – or $375 million a day. SG contributions were $77 billion, representing 57 per cent of the total. Voluntary contributions are also a major growth driver of the system: while SG contributions have grown by 4.5 times over the past 20 years, non-SG contributions have grown at precisely the same rate.
Rainmaker says Australian super funds paid out $101 billion in benefits in 2015-16: meaning that about $275 million a day leaves the super system. Thus, the system shows a net inflow of $36 billion, or almost $100 million a day.
Dunnin says a crucial factor that will delay the tipping point of net drawdown is the increasing preference for benefits to be paid as annual income streams (pensions), rather than taken as lump sums on retirement.
"Ten years ago, 59 per cent of benefit payments were paid as lump sums, by 2016 this had plummeted to 36 per cent and by the end of the next decade, our modelling projects it will crash down to 22 per cent," he says.
"By the end of the following decade it will be just 12 per cent. What's interesting is that this shift is already happening, well ahead of any compulsory requirements regarding income streams that might be legislated," says Dunnin.
With the proportion of money in the superannuation system set to increase from 25 per cent at present to near 40 per cent over the next 20 years, the focus of the system will move away from the concentration on managing the money so as to accumulate, to a mindset where longevity risk and downside protection increase in importance.
"The strategies that funds put in place for retirement products, the increased focus on longevity risk and the pooling of that risk, even the psychology of managing money in the drawdown phase, are all going to be hugely important factors for the superannuation industry," says Knox. "Fund members are increasingly going to be demanding that their funds tackle this properly."
To find out more, click here to download the full Mercer 2020 Super Fund Executive Survey Report.