Wednesday, March 11, 2009

"Australia’s pension exposure to equities spells doom"

So writes Stephen Koukoulas of TD Securites:

The chart below is from the IMF, reproduced courtesy of one of my favourite websites,

It highlights a quite frightening concentration in the asset allocation of Australia’s pension funds towards equities. Around 85% of pension fund assets are in equities (with the U.S. having around 65%, by way of comparison). For years, we have heard the virtues of Australia’s compulsory superannuation scheme which was started in the early 1990s as the visionary Hawke / Keating government anticipated the aging of the population and the fiscal time-bomb that would explode if these people relied wholly on the public purse for their retirement income.

As a result, Australia’s funds under management grew to over 100% of GDP and the policy of taking out 9% of pre-tax income and allocating it toward future pensions had largely diffused the bomb.

Alas, there is a problem. The overwhelming majority of those funds were allocated to stocks...

...which in an era where the ASX 200 is down around 55% and is also back to the levels of 2000, tells us that the behaviour of retirees and soon-to-be retirees will change. Even for others well away from retirement, the amount of money now is the pension scheme is disappointingly low simply because of the asset allocation.

Australia’s spending and savings behaviour will necessarily change. We have already seen the household saving ratio jump to an 18 year high and with it, consumer spending slump. For the first time in many decades, household debt ratios are falling. While this is a necessary and total logical and prudent reaction of consumers, it spells disaster for GDP growth.

If the stock market remains depressed, the pension performance will continue to drag the Australian economy lower. This is yet another reason why the RBA needs to ramp up the rate cuts and work to boost profits and with it the stock market.