A new paper by ASFA examining the sources for, and intermediaries for, the funding of investment by Australia’s business sector shows that Australia’s home-grown private pension system is doing some heavy lifting supporting critical infrastructure and business growth, particularly in comparison to that of other developed overseas economies.
But as asset allocation decisions are made by trustees at the product or investment-option level and must be in members’ best financial interest, the paper explores some of the impediments to more efficient allocation of funding and the impact on future capital investment.
Super is helping drive growth and productivity
For Australia’s business sector, the bulk of funding for new fixed capital investment – and, by extension, capital deepening – is intermediated via Australia’s financial system, which includes Australia’s superannuation sector.
Capital deepening is an increase in capital investment per worker (such as machinery, tools, technology and infrastructure). Business investment that lifts capital per worker underpins productivity growth, and so when productivity increases and broadly distributed, living standards are lifted.
Superannuation is now one of the biggest sources of long-term funding for Australian business having outgrown banks.
While banks are still the largest single domestic investment source overall at 44%, super now follows closely at 39% (that is, 28% institutional super funds plus 11% self-managed super funds) and this has risen strongly over two decades.
However super has overtaken banks as a funder of incorporated businesses but it is expected that unincorporated businesses (such as smaller businesses/sole traders) will continue to be predominantly financed by banks through loans.
Australia’s super system sets us apart from the rest of the world
Compared with other OECD countries, where institutional capital is more heavily concentrated in insurers, investment funds, and public pension structures, Australia has a much larger share of national investment through individuals’ private savings. Everyday Australians are therefore increasingly having an ownership stake in the economy and its growth.
Overseas there is a shortage of capital funding for the private sector. Most notable is the UK’s mandate on their pension funds to invest 5% in UK private markets.
Australia however is fortunate to have deep capital markets and national savings at around 1 trillion more than it otherwise would without superannuation. Superannuation has created a huge pool for businesses to use to invest in productivity gains.
Domestic funding for Australia’s business sector
Total accumulated domestic funding for Australia’s business sector is approximately $3.1 trillion, and this is largely used to fund new investments in fixed capital.
This can be broken down into:
- Share of domestic business funding: deposit-taking institutions (mostly banks) about 44%; institutional super funds about 28%; SMSFs about 11%.
- Over the last two decades, super’s total share rose from about 23% to about 39% (ie super funds and SMSFs combined)
- Incorporated business: banks about 36% vs super about 44% combined (institutional funds plus SMSFs).
- Institutional super funding is overwhelmingly via listed and unlisted equity, including stakes in companies and structures holding commercial property and infrastructure.
- Corporate bonds and other debt securities are only about 2% of total domestic funding for incorporated business.
- Business fixed capital investment is around $330b in FY2024-25 (around $400b if business investment undertaken on behalf of government is included).
Business investment that lifts capital per worker supports productivity growth
Super fund members increasingly have a stake in the economy because retirement savings are a major source of long-term funding for business and long-term assets. The returns accrue back to members.
The legislated purpose of super is that trustees must invest in members’ best financial interests.
However, investment decisions are made at the product level for members, and so this may not necessarily align with the economy’s overall funding needs.
In the paper ASFA finds that while institutional superannuation will remain a vital funding source for the real economy for decades to come, Australia’s business sector would benefit from greater diversity of financing options to better support new fixed capital investment.
There are constraints around super providing capital, such as performance tests, and other regulatory gaps preventing wider investment.
To contribute to Australia’s capital-deepening dynamic and therefor boost Australia’s rate of productivity growth, policy needs to broaden domestic sources of private funding.
Other key potential policy levers, particularly with respect to Australia’s energy transition and emerging industries, is government-funded specialist investment vehicles – which would benefit from greater visibility and centralisation of funding mechanisms.
Australia’s capital deepening dynamic (the key driver of productivity growth) is facilitated by funding intermediated by Australia’s world-class financial system.
If government wants to unlock super investment, it must make more opportunities investable on commercial terms so that they are clearly in members’ best financial interests.
To find out more, you read ASFA’s Superannuation Support for Business Growth in Australia paper.
For further information, contact policy@superannuation.asn.au.
Join our member webinar on 24 April
Date: 24 April
Time: 11:00–11:45am
To support members in understanding the research findings and implications for the sector, ASFA is hosting a joint member webinar alongside the Australian Investment Council (AIC).
Speakers:
Mary Delahunty, ASFA CEO
Andrew Craston, ASFA Economic Specialist
Navleen Prasad, AIC CEO
Find out more and register here.
