When Paul Keating kicked off compulsory superannuation contributions in 1992 at a modest 3 per cent, few would have foreseen that it was the birth of one of the most inclusive, and in the years to follow, one of the largest retirement savings systems in the world.
Fast forward 27 years and Australia’s superannuation system is now worth an estimated $2.7 trillion and is ranked as the fourth best in the world behind the Netherlands, Denmark and Finland. It also represents one of the fastest-growing retirement funds globally, currently at around 130 per cent of GDP. With compulsory contributions legislated to increase to 12 per cent by 2025-26 there have been estimates that the pot could quadruple in size in the next 10 to 20 years.
But while the size of the pot and participation rate are world-leading, superannuation funds have never faced more intense scrutiny than at present. There is a growing view that the current superannuation default system is grossly outdated and awash with under-performing funds who need to shape up or ship our money out to funds with better returns.
The Hayne Royal Commission shone a spotlight on this poor performance in addition to highlighting the colossal amount of super that has been eroded by excessive administration fees and insurance add-ons. Indeed members of a number of managed funds would have been better off with their savings under the mattress. With the Productivity Commission now demanding an inquiry into the total retirement incomes system, it seems that superannuation funds will need to change their ways if they are to survive.
But this shouldn’t come as a surprise to anyone. There has long been a significant problem with the way that super funds are investing members’ money. Australia, even with its supposedly progressive retirement savings system, is lagging in comparison to its global counterparts where allocation to private credit, infrastructure, hedge funds and private equity, including venture capital are all increasing. The $2.7 trillion available to invest is larger than the capitalisation of the Australian stock market and unfortunately this is where approximately a quarter of our retirement savings are going. In a buoyant market this may be well and good but against the backdrop of sliding global markets, this has been disastrous for fund value. The ASX was down 7 per cent in 2018 and the sell-off has continued into 2019 with a bleak outlook for the remainder of the year. If funds are to survive in the post-royal commission era a radical overhaul of their investment and management strategy is unavoidable.
To date, Australian super funds’ asset allocation to venture capital have been slow on the uptake. Of the $2.7 trillion in Australia’s retirement pot, just 1.4 per cent has been allocated to private equity, and much less in venture capital. Of course, there are outliers such as Australian Ethical and HostPlus who have considerable exposure to venture capital in comparison to their peers. But there is still room for improvement.
One exception is the Australian Government’s Future Fund. In 2018, the Future Fund allocated more than 4 per cent of funds to venture capital and returns over the seven years to September 30, 2018 averaged 10.7 per cent. The venture capital and growth equity component of this fund in isolation increased by 23.3 per cent.
Venture capital is, of course, not the only asset class that is uncorrelated to bonds and equities but there are numerous other reasons that venture capital deserves a place at the top table of the super funds. Ten years ago, there was only one tech company in the world’s top ten companies by market capitalisation. Now there’s six. Whether the six can maintain their rates of growth is yet to be determined, but we know that tech will continue to be of fundamental importance to the world’s economies. The smart investors know they need to access tech at the early expansion stage to capitalise when these companies eventually list, at often hefty valuations.
For those of us making the decisions on which early stage companies to invest in, it’s clear that the opportunities are abundant, and venture capital is undercapitalised. We want to see more Australians as creators of technology, not just as customers or consumers. This is vital for the future of the broader Australian economy. The lack of funds is a problem that can be easily solved when we look at the growing retirement pot and Australian super funds fight for survival.