The challenge for Australia is the ability to use the financial resources generated by superannuation and the private wealth market to exploit new and emerging opportunities, according to Rice Warner.
The research house said, given the uncertainty the COVID-19 pandemic had brought, the country needed to think about the impact of the size and share of the super system which was the biggest engine available to finance the investment Australia needed.
While understanding future growth of super assets and where they might be deployed was essential to planning, modelling would be a significant challenge this year due to the pandemic.
“Whilst a permanent reduction in the population growth rate would provide an opportunity for per capita GDP to grow and enrich all Australians, the political mantra of growth for its own sake will probably prevail,” Rice Warner said in an analysis.
It said the differences to modelling this year were:
- COVID-19 has caused economic turmoil globally and the outlook for equity prices and the valuations for many real assets (property and infrastructure) is very uncertain;
- Interest rates remain at historically low levels and are held down by central banks – with no sign of any medium-term lift;
- Wage growth is low and high unemployment suggests growth (and superannuation guarantee (SG) contributions) will remain stagnant;
- Superannuation liquidity has been impacted by the Early Release Scheme; and
- Australia is in recession with many business sectors facing a dismal future in the near term.
Rice Warner said short-term impacts included:
- Negligible migration and temporary residents, so fewer new member accounts will be created;
- High unemployment, leading to lower SG contributions;
- Higher insurance claims from a deterioration in mental health (including a higher suicide rate);
- Very low earnings on cash and fixed interest;
- Negligible wage inflation and CPI under1%;
- Reduced growth in SG contributions due to higher unemployment and low wage increases;
- Reduced levels of voluntary contributions due to lack of consumer confidence;
- Reduced pension withdrawals as minimum payments have been reduced to 50% of normal minimum; and
- Stagnant prices of growth assets with reduced earnings, including lower dividends.
The research house noted that knowing these factors had moved to “extremal values was only part of the challenge” and that estimating the extent of the divergence in these factors from long-term trends, and how long the divergence would last, added significantly to the complexity and uncertainty of modelling.
“Rapid V-shaped changes in equity market valuations do not translate directly to the broader economy. Scenario testing will be very important this year,” it said.