(Bloomberg) – Juggling some A$3.4 trillion ($2.4 trillion) in assets in one of the most inflationary markets ever endured by many Australian pension fund managers only adds to the growing list of their worries for 2022.
As the industry enters its 30th year of investing the savings of Australian workers, it’s clear that the world’s fourth-largest pension pot is likely to be weighed down by the main consequences of its success: scale and affecting.
On the one hand, the industry faces a beefed-up regulator that tightens scrutiny of the performance and fees of so-called superannuation funds that now own about a fifth of the stock market; and in another, the Conservative government appears to disagree with the industry’s position on fossil fuels and braces for a fight as it seeks re-election after eight years in office.
On top of that, some of the world’s biggest investors are playing a role for their companies, just as the industry is facing a wave of baby boomers retiring and dipping into their pensions. All of this could make expected bouts of volatility from central bankers battling the post-pandemic inflation spurt more difficult to manage.
“I’m just going to focus on money management,” said Con Michalakis, chief investment officer at Statewide Super in Adelaide. “If you do that, it saves you from getting caught up in things you can’t control.”
Here’s what’s likely to rattle Australia’s pension chiefs next year:
Funds can expect a two-pronged battle. There will be stiff competition for talent as Australia’s borders remain closed – potentially seeing less experienced workers hired into management positions due to firms’ reluctance to offer pay in line with investment banks and top managers funds from around the world.
But they also face rivalry from offshore investment giants seeking a share of their business. Fidelity and Allianz SE are looking to offer annuity-like products, while KKR & Co. is pumping A$430m into Colonial First State after buying a majority stake in the pension fund. Meanwhile, Vanguard Group Inc. is leveraging its already huge presence in Australia to launch its own low-cost superannuation fund next year as it eyes a pool of money expected to reach $5.4 trillion. Australian dollars this decade.
A disjointed election
While polls show the opposition Labor party winning the national elections due in May, it’s still anyone’s game. The current Conservative government has already chased votes by suggesting early access to pension funds, much to industry jitters. It’s a popular idea: Workers took a big advantage when they were allowed access to their savings at the start of the pandemic, leading lawmakers to suggest that first-time home buyers could make same.
In the meantime, for a government desperate to woo more women following a series of sexual harassment scandals, opposition parties will likely push it to honor its promise to scrap the cap on compulsory contributions – a small change that would help close the gender pension gap.
Australian pensions are lining up to make net zero pledges for their investments. While some are restricting investment in thermal coal, most have few concrete plans to achieve their goals other than engaging with companies and threatening to vote down non-compliant boards. It has kept campaigners busy, emboldened by last year’s landmark legal settlement when Retail Employees Superannuation Trust was sued for not being green enough. The issue has left pensions between a rock and a hard place as lawmakers on both sides of politics engage with the fossil fuel industry to varying degrees.
A major test of pension funds’ new climate concern comes in the first quarter when BHP Group offloads its oil and gas assets to Woodside Petroleum Ltd. Are they reducing their exposure to Woodside when BHP holders receive new shares, or are they keeping them with a view that gas is a transition fuel to a low-carbon economy, appeasing lawmakers?
This elusive yield
The main objective of the funds – to generate returns on investment for members – is becoming more and more difficult. Pension managers have warned that strong returns will be harder to come by as the easy money from the rebound in equities from the early days of the pandemic has already been made. The funds will instead pursue a year-long program to increase private asset purchases with inflation-linked income.
While Australian repos offered a median return of 18% in the year to June, they could do better. California’s public employee pension system, its US counterpart, posted a return of 21.3% over the same period, with only two Australian funds beating that performance, according to the Lonsec Group. Just this week, UniSuper, one of Australia’s largest pension funds, slashed return on investment targets for its retirement savings plans.
Realize… Or Otherwise
After years of warning pension funds to improve their returns, the Australian Prudential Regulation Authority has lost patience. He ordered two funds in as many months to merge partly due to poor performance, with further actions likely to follow. In the so-called prime sector, where workers select their own investments, more than 60% of plans underperform against APRA benchmarks, while fees and costs are significantly higher than options by default but without any clear benefit to member savings, APRA said last week. .
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