Our superannuation system has weathered the toughest stress test it has ever faced and has emerged from the global financial crisis with world-leading growth numbers.

This week an annual survey of the world's top 300 pension funds showed the relative strength of our superannuation system on a global basis.

Eleven Australian super funds made it on to the list of the top 300 pension funds ranked by assets in US dollar terms that is compiled by US financial services newspaper Pensions & Investments and asset consultants Watson Wyatt each year.
Overall global pension funds assets fell 12.6% to $US10.6 trillion – only the second time in 20 years that asset values have gone backwards globally.

It also showed where the effects of the global financial crisis were the most severe – US pension funds managed annual growth rates of just 4% over the past five years. In Australia the top funds delivered growth above 14% over the same five year period. Included in the survey is our sovereign Future Fund along with other major funds like State Super, AustralianSuper, QSuper, Unisuper, ARIA, ESSSuper, First State Super, Hesta, Sunsuper and Cbus.

Just as the Australian economy has defied the odds by not dipping into recession our superannuation system is showing that the foundations of the system – in particular the mandatory 9% contribution rate – is fundamentally sound and the growth of the assets in super will help Australians fund a more comfortable retirement than our age pension system can support.

But that does not mean the system can't be improved – and certainly the global financial crisis has highlighted some real areas of concern. A number of reviews and inquiries are underway that potentially will reshape our super system in the long term.

The Cooper Review is just beginning a wide-ranging review of the whole super system and its structure. The Henry Tax Review is due to report late this year and while super is not its only focus it has flagged its interest in looking at adequacy of super savings and retirement income structures.

Reviews of super are always a double-edged sword – they can bring meaningful improvement but always heighten the legislative risk that super investors face.

A lot of the focus of the super industry is on the adequacy of savings but what the global financial crisis highlighted painfully is how exposed retirees are to big falls in asset values. Our defined contribution system means that for most members of super funds they shoulder all the pain when asset values drop significantly. Now 2008 may prove to be an outlying event but that will be cold comfort to people who retired recently and now cannot replenish their capital.

This is arguably the single biggest challenge for the super industry – providing a range of income products with the right level of risk and return. Annuity products are not popular in Australia – they are unattractive when it involves handing over substantial sums of capital and effectively betting against the insurance company that you will live longer than average.

And there is also the issue of counterparty risk – if an insurance company has promised to pay you a lifetime income how can you be confident they will be around in 20 or 30 years to still pay it? Counterparty risk went from background technicality to harsh reality during the GFC and no-one now believes that major banks and financial institutions are immune when the system is under stress.

The answer may involve a role for government in the form of some supporting guarantee for private pensions not unlike the bank deposit guarantee that was put in place to give investors comfort that bank deposits were secure. Or perhaps the ability to buy a higher entitlement through the age pension system from age 85 onwards would be another way of offsetting the longevity risk.

Education and advice are going to be needed to ensure people are better prepared for their retirement years. Around 70% of Australians do not get professional financial advice. Clearly more need to seek advice but the cost and complexity are structural hurdles the industry needs to clear away so that the right level of advice can be delivered at a much lower cost.

The global financial crisis may not be completely behind us but even if it still has some time to run before we are confident that we back on the path of long-term growth what is becoming very clear is that the provision of retirement incomes is looming as a much bigger, longer term challenge for the industry to deal with.