Australia's superannuation market is the fastest growing among other major pension systems around the globe, a new Willis Towers Watson study shows.
Australia's superannuation assets grew 12.1% over the last 20 years thanks to the success of government-mandated pension contributions, a competitive institutional model and the dominance of defined contribution (DC) schemes, WTW's 2018 Global Pension Asset Study shows.
The study analysed 22 major markets with US$41.3 trillion assets at the end of 2017. The US held the largest pool of assets (US$25.4tn), followed by the UK (US$3.11tn) and Japan (US$3.1tn).
Australia sat in fourth place with US$1.92 trillion or $2.44 trillion - assets which surpass the nation's gross domestic product at 138.4%, the report said.
Willis Towers Watson global head of investment content Roger Urwin said while the overall short-term figures are positive these are due to unusually high market returns.
"Looking back at 20 years of progress makes for encouraging reading. In particular, the improving position of pension assets as a proportion of GDP and the evolution of pension fund governance, which has risen up trustees' agendas and is certainly a lot stronger as a result," he said.
About 87% of Australia's pension market operates under a DC model, which is also common in the US.
Defined benefits (DB) meanwhile dominate the pension systems in Japan (96%), Canada (95%), the Netherlands (94%) and the UK (81%). Japan and Canada however, are now showing signs of a shift to DC, the report said.
Urwin said DC now accounts for 49% of total assets across the seven largest pensions markets (Australia, Canada, Japan, Netherland, US, UK and Switzerland) as funds continue to experience positive net cash flow and relatively lower levels of benefit withdrawals compared to their DB counterparts.
"As such we would expect DC assets to become larger than DB assets within the next two years," he added.
Along with Canada, the UK and the US, WTW highlighted Australia's "above average" allocation to equities (49%), followed by a preference to other asset classes (22%), cash (15%) and bonds (14%).
Urwin said the home bias for equities has reduced in the last 20 years from 68.7% to 41.1% in 2017.
"The challenges faced by pension funds are complex. Our research suggests that pension plans must consider and address several key issues, such as: regulation; changes in the available investment universe; new investment methods; and how to measure progress and success of a pension plan. There is also the developing issue of true integration of ESG, stewardship and sustainability within overarching investment strategies," he said.