Australia’s retirement savings are too big to invest at home – here’s why super funds are looking to the US

You might remember Pesto, the king penguin chick who became a star attraction at Melbourne Aquarium last year. Good food, good genes and a safe home let Pesto grow into a huge ball of brown fluff twice the size of his parents. Pesto became a local and international celebrity.

While not cute or funny like Pesto, Australia’s financial sector gave birth to its own baby three decades ago that has since rapidly grown into a big adult – superannuation. It, too, has become internationally famous.

This week, our superannuation sector attracted the attention of US asset managers and government officials, including the new US Treasury Secretary Scott Bessent, at a summit in Washington DC.

Super industry leaders joined Treasurer Jim Chalmers and the Australian ambassador to the US, Kevin Rudd, to pitch a strengthening of ties. So, why are Australian super funds so keen to shore up support in the United States?

Read more: Your super fund is invested in private markets. What are they and why has ASIC raised concerns?

A giant nest egg

Figures from the Australian Prudential Regulation Authority (APRA) show the total pool of superannuation assets had grown to about A$4.2 trillion by December 2024. That’s up 11.5% on the year before.

That’s about 160% of the value of all goods and services produced in Australia – the gross domestic product (GDP) – over the year to June 2024 at $2.6 trillion.

This scales to a very large pool of investable retirement money – the fifth largest in the world. Australia’s population ranks just 54th in the world.

Some of the biggest individual funds have significant assets under management. Australian Super and Australian Retirement Trust, for example, both manage more than $300 billion in retirement savings.

Jim Chalmers, Scott Bessent and Kevin Rudd were joined by super industry leaders at a summit in Washington this week. AAP Image/Supplied by DFAT, Michael Butcher

Looking overseas

This leads us to why the Australian super industry is securing openings in the US. Australian super funds have invested some funds overseas since their inception. But this practice is expanding quickly for two reasons.

First, the sheer size of the superannuation investment pool has largely outgrown its Australian asset base.

To illustrate, our $4.2 trillion super pool is significantly larger than the total market capitalisation of the Australian Securities Exchange (ASX), about $3.1 trillion.

Without new places to invest our super, it’s impossible to keep earning a return on it.

The second – and related – reason is the need for diversification. It makes sense to lower risk by spreading funds across industries, geographies and jurisdictions.

A scan of the aggregated asset allocation of large Australian super funds shows that around half of the funds invested in equities, property and infrastructure are currently in overseas assets.

The US accounts for about 45% of aggregate financial assets of all investors worldwide – more than US$90 trillion (A$144 trillion).

The strategy to diversify investments has paid off. The US stock market has seen some spectacular recent returns, with annual returns of more than 20% in some years. These have far outpaced those of the ASX.

Compulsory savings

Australia’s super sector has been fed by compulsory contributions (savings) and investment returns. Super has also been protected by legislation that makes participation compulsory for most workers and preserves savings until retirement.

Australia has had a system of compulsory employer superannuation contributions for workers since 1992. DGLimages/Shutterstock

Since 1992, employers have made compulsory (superannuation guarantee) contributions on behalf of workers into superannuation accounts. The compulsory contribution has risen significantly from an initial 3% of earnings to 12% of earnings from July this year.

High coverage (well over 90% of workers), combined with rising contribution rates, has meant the amount of money flowing into superannuation accounts has grown at a remarkable compound annual rate of 14% since 1992.

Even after the superannuation guarantee rate peaks at 12% this year, growth in labour earnings, fed by workforce and productivity growth, will continue to generate substantial inflows.

Can’t touch our nest egg early

Australia’s strict rules preventing withdrawals from super are among the tightest in the world. With some exceptions for extreme hardship, members of super funds can withdraw their savings from age 60 if they retire, and from age 65 even if they have not retired.

An ageing population will mean more retirees in future decades, speeding up outflows. But so far, Australian retirees are proving to be very cautious with their nest eggs.

Along with compulsory contributions and rules on withdrawing it, investment returns have grown the super baby, at rates of 7.3% annually over the past 30 years, or about 4.4% annually above inflation.

The super sector is still smaller than its older sibling, the banking system, where assets of A$6.3 trillion are about 240% of the value of annual GDP. But super is forecast to grow to 200% of annual GDP over the next two decades.

Like Pesto the king penguin, Australia’s pool of superannuation savings has come of age and become internationally famous. AAP Image/Supplied by SEA LIFE Melbourne Aquarium

Riskier investments

To generate these rates of return, Australian super funds have invested in a wide range of financial assets, and with a substantial exposure to high return (but riskier) assets.

In Australia, super funds invest around two-thirds of funds in equities, property, infrastructure and commodities, and around one-third in safer bonds and cash.

That contrasts with some other pension systems, such as Japan and the UK, where a majority of funds are invested in safer assets like government bonds.