Australian pension funds go global in search of assets
Although the largest global national pension funds still belong to Japan, Norway, and South Korea, no other nation in the world has even come close to matching the growth rate of Australia’s pension system which has expanded by over 630% from 2002 to 2022.
This growth of the superannuation industry is quickly exceeding its local boundaries, pushing funds to actively look for opportunities in international markets.
“During the 2021-22 financial year, Australians contributed a record-breaking A$163 billion to their superannuation accounts. Furthermore, investment returns have remained resilient over the last financial year, even within a challenging economic environment,” Sonya Sawtell-Rickson, chief investment officer at HESTA told AsianInvestor.
HESTA
“Australia has one of the world’s best superannuation systems. Employers are required to contribute 11% of an employee's salary to a superannuation fund. This system has been in place for several decades, leading to A$3.5 trillion in funds accumulating in Australian pension accounts,” Sawtell-Rickson added.
GLOBAL EXPANSION
Currently, Australia's pension assets account for 124% of national GDP. Projections indicate that this figure may double to 250%, by 2060.
As a whole, superannuation funds hold about 47.8% of their assets offshore, according to the National Australia Bank (NAB) Super Insights Report 2023.
The rising trend of allocation to international assets is being spearheaded by larger Australian funds, highlighting the ongoing challenge to deploy incoming capital to the domestic market as readily as smaller funds without amplifying concentration risk as they seek diversification and attractive risk adjusted returns, said NAB’s research.
“HESTA has a large portion of its A$76 billion portfolio diversified across the globe to capture excellent opportunities for members. This means we have access to private, public, and various asset classes to support members in growing their retirement balances,” said Sawtell-Rickson.
For a major fund like Aware Super, globalising its investment strategy provides the fund exposure to a far broader opportunity set, a spokesperson for the A$160 billion super fund told AsianInvestor.
“It enables us to further diversify our portfolio and find more compelling investment opportunities, tapping expertise in offshore markets widely and efficiently, so we can keep delivering strong long-term returns for our 1.1 million members,” they said.
Large players like Aware Super, and its competitor, AustralianSuper have even extended their reach by establishing offices in other global financial hubs, such as London and New York. Both funds have indicated they expect to increase their relative exposure to unlisted international infrastructure, property and private credit in the near future.
“By having an ‘on-the-ground’ presence abroad, we can also leverage our existing networks and develop new networks, and it supports ongoing oversight of our international portfolio,” said Aware Super’s spokesperson.
AWARE IN EUROPE
Aware Super plans to expand its assets to $164 billion (A$250 billion), with its UK and European international expansion being a crucial step towards this goal.
Through its London office, Aware will focus on direct investments mainly in real estate, infrastructure, and private equity - particularly in energy transition, affordable housing, innovation, life sciences, technology, and digital infrastructure.
At the UK’s Global Investment Summit in London on November 27, Aware Super signed memorandum of understanding (MOU) with the UK Government to commit a further $6.6 billion to the UK and European markets in the future.
The fund already has $11.2 billion (A$17 billion) invested in the UK and Europe, which includes a 22% stake in UK residential build-to-rent community Get Living. It also holds significant infrastructure and private equity investments in the UK.
INFRASTRUCTURE AND ENERGY
At the Summit in London, IFM Investors, which is owned by several of Australia's largest pension funds, also signed an MOU to allocate $12.6 billion to infrastructure and energy transition projects in the UK by 2027.
IFM Investors
The Australian pension system is currently approximately $2.3 trillion (A$3.45 trillion) and expected to grow to approximately $5.9 trillion (A$9 trillion) by 2040. The structure of the Australian pension system also facilitates significant allocations to unlisted assets, so it makes infrastructure across the energy transition a very attractive asset class, according to IFM Investors’ chief strategy officer Luba Nikulina.
“Increasingly more capital will need to be deployed in aligned economies such as the United Kingdom. We believe the UK government is taking steps to help facilitate long-term investment in infrastructure and the energy transition, which we strongly support,” Nikulina told AsianInvestor.
“The National Infrastructure Commission says private investment needs to increase by as much as £20 billion ($38.4 billion) every year to 2050 to help government meet its net zero targets, so it makes sense for government to look to private capital to help do the heavy lifting,” she said.
As part of this MOU, IFM Investors will consider investments in offshore wind, solar, battery storage, carbon capture and storage, renewable fuels and pumped hydro in the energy space; in regulated assets, electricity transmission and distribution; ports, toll roads and airports in transport; data centres and fibre in the digital economy, said Nikulina.
“IFM and the Australian industry pension funds which own it are looking for long-term stable returns to pay retirement incomes, in countries which can offer a pipeline of projects subject to predictable regulatory regimes,” she said.
“The trend also reflects the appetite of IFM and Australian ‘super funds’ to invest globally, including in the UK market.”