Managers of $2.4 Trillion in Aussie Pensions Face a Tough 2022

(Bloomberg) -- Juggling some A$3.4 trillion ($2.4 trillion) of assets in one of the most inflationary markets ever endured by many of Australia’s pension fund managers just adds to the growing list of their worries for 2022.

As the industry notches up its 30th year of investing Australian workers’ savings, it’s clear that the world’s fourth largest pension pot risks being weighed down by the main offshoots of its success: scale and influence.

On one front, the industry faces a strengthened regulator that’s tightening scrutiny on performance and fees of so-called superannuation funds that now own about a fifth of the stock market; and in another, the conservative government seemingly at odds with the industry’s stance on fossil fuels and preparing for a fight as it seeks re-election after eight years in power.

On top of that, some of the world’s biggest investors are making a play for their business, just as the industry confronts a wave of baby-boomers entering retirement and drawing down their pensions. It could all make the expected bouts of volatility from central bankers’ fighting the post-pandemic inflation surge feel that bit tougher to deal with.

“I’m just going to focus on managing the money,” said Con Michalakis, chief investment officer at Statewide Super in Adelaide. “If you do that, it releases yourself from getting caught up in stuff that you can’t control.”

Here’s what’s likely to be rattling Australia’s pensions chiefs next year:

Richer Rivals

Funds can expect a battle on two fronts. There’ll be tough competition for talent as Australia’s borders remain closed -- potentially seeing less experienced workers hired for senior roles out of firms’ reluctance to offer pay packets in line with investment banks and the world’s biggest fund managers. 

But they’re also facing rivalry from offshore investment giants seeking a slice of their business. Fidelity and Allianz SE are looking to offer annuity-like products, while KKR & Co. is injecting A$430 million into Colonial First State after buying a majority stake in the pension fund. Meantime, 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 money pool expected to grow to A$5.4 trillion this decade. 

A Scrappy Election 

While polls point to the opposition Labor party winning the national election that’s due by May, it’s still anybody’s game. The current conservative government has previously chased votes by suggesting early access to superannuation funds, much to the industry’s nervousness. It’s a popular idea: workers took big advantage when they were allowed to access their savings in the early days of the pandemic, leading lawmakers to suggest first-time home buyers could do the same. 

Meantime, for a government that’s desperate to woo more women following a series of sexual harassment scandals, opposition parties will likely push it to honor a pledge to remove a cap on compulsory contributions -- a small change that would help close the gender pension gap. 

Climate Cred 

Australian pensions are lining up to make net-zero pledges for their investments. While some are restricting thermal coal investments, most have few concrete plans on hitting their goals other than engaging with firms and threatening to vote against non-compliant boards. That’s got activists busy, emboldened by last year’s landmark court settlement when Retail Employees Superannuation Trust was sued for not being green enough. The issue has left pensions between a rock and hard place as lawmakers on both sides of politics engage with the fossil fuel industry to differing extents. 

A major test of pension funds’ new found climate concern comes in the first quarter when BHP Group offloads its oil and gas assets to Woodside Petroleum Ltd. Do they cut their exposure to Woodside when holders of BHP are issued new shares, or keep them with a view gas is a transition fuel toward a low-carbon economy, appeasing lawmakers? 

That Elusive Yield

The core focus of funds -- to generate investment returns for members -- is getting tougher. Pension managers have been warning strong returns will be harder to come by as the easy money from the stock rebound after the early days of the pandemic has already been made. Funds will instead continue a years-long program to ramp up purchases of private assets with inflation-linked income. 

While Australian pensions offered a median return of 18% in the year through June, they could be doing better. U.S. peer California Public Employees’ Retirement System returned 21.3% in the same period, with only two Aussie funds beating that performance, according to Lonsec Group. Just this week, UniSuper, one of the biggest Australian pensions, cut the investment return targets across its retirement savings plans.

Perform... Or Else 

After years of warning pension funds to improve their returns, the Australian Prudential Regulation Authority has lost its patience. It’s ordered two funds in as many months to merge partly due to poor performance, with more actions likely to come. In the so-called choice sector, where workers select their own investments, more than 60% of plans are underperforming APRA’s benchmarks, while fees and costs are considerably higher than default options but without any clear benefit to members’ savings, APRA said last week. 

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