Managed funds in the Asian Century - A real opportunity for Australia?

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28 October 2012 | By Michael Chaaya (Partner)

The White Paper on Australia in the Asian Century was released today and is designed to identify the steps we should be taking to seize the opportunities and meet the challenges arising from the Asian Century.

One important challenge which arises for the managed funds industry in Australia is the need to capitalise on the domestic success of the system, in particular the superannuation sector, and export that success to our neighbours in the Asia-Pacific region.  Efficient regulatory reform, the pursuit of the Asia Region Funds Passport, tax reform, and the removal of regulatory barriers to investors such as superannuation funds participating in infrastructure financing are some of the many so-called “pathways” to guide Australia in the Asian Century to 2025.

Will the White Paper provide the necessary impetus to realise these pathways, or will they remain part of the managed funds industry’s wish list?  If the discussion of these matters in the White Paper is any indicator, it seems the momentum for change in our engagement with Asia is felt strongly by the Federal Government and the private sector case studies highlighted in the White Paper.

Managed funds in Australia and the significance of superannuation

Australians have the highest average per capita investment in managed funds in the world. The Australian managed funds industry is the fourth largest in the world (after the US, France and Luxembourg) and the largest in the Asia-Pacific region.  Although a large proportion of the growth in managed funds has come from superannuation[1], Australia's growing number of high net worth individuals and a stronger culture of saving will also fuel industry growth.  The White Paper states that “[a]n increasingly wealthy and mobile middle class is emerging in the region, creating new opportunities.  They are demanding a diverse range of goods and services from health and aged care to ... banking and financial services.[2]

In 1993 when compulsory superannuation was introduced in Australia, total superannuation assets amounted to $183 billion.  Following almost 25 years of development, Australia’s superannuation system combines with the broader managed funds industry to be worth over $1.8 trillion.  Superannuation savings represent approximately $1.36 trillion (or 76% of the market).  This explains why the overwhelming focus on Australia’s investment sector is superannuation.

The opportunity for Australia’s superannuation industry in the Asia-Pacific region

In 2010, the Johnson Report found that although Australia’s financial services sector had emerged strongly from the global financial crisis due to its well regulated institutions, the level of engagement of the sector in cross-border activities across the Asia-Pacific region is less strong.  The Report also noted that our imports and exports of financial services given the size of the financial services industry are low by international standards.  These sentiments are echoed in the White Paper, which also notes that our financial institutions are sound and that Australian businesses can offer high value and innovative products and services across the region.[3]

Although Australia may have missed the opportunity to become the financial services hub for the Asia-Pacific region (with that role being assumed by Hong Kong and Singapore), there is a clear opportunity to hold out Australia’s managed funds industry as a beacon of best practice and one with a lot to offer the Asia-Pacific region at large.

Given the size of the managed funds industry in Australia and its projected growth, there are strong reasons why the White Paper and the 25 far-reaching objectives it identifies should be viewed as the perfect platform to continue Australia’s push to influence and shape the managed funds industry across the Asia-Pacific region. 

In the recent Melbourne Mercer Global Pension Index (Mercer Index) results, Australia ranks third (with a B+ grading) after Denmark and the Netherlands in terms of adequacy, sustainability and integrity in the retirement income system.  Australia is described as having a superannuation system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.

Our neighbours in the Asia-Pacific region who participate in the Mercer Index (namely, China, India, Japan and South Korea) feature at the bottom of the table with a D grading.  Each is described as having a retirement income system that has some desirable features, but also major weaknesses and/or omissions that need to be addressed.  Without these improvements, the efficacy and sustainability of their superannuation systems is in doubt.

Exporting the success of Australia’s superannuation system

The Mercer Index identifies the following factors which could be adopted by China and India respectively to improve their overall retirement income system grading:

China

  • introducing taxation incentives for employee contributions to the supplementary plans provided by employers;
  • introducing a requirement that part of the supplementary retirement benefit must be taken as an income stream;
  • increasing the state pension age over time;
  • enabling individuals to retire gradually whilst receiving a part pension; and
  • improving the level of communication required from pension plans to members.

India

  • introducing a minimum level of support for the poorest aged individuals;
  • introducing a minimum access age so that it is clear that benefits are preserved for retirement purposes;
  • improving the regulatory requirements for the private pension system;
  • continuing to improve the required level of communication to members from pension arrangements; and
  • increasing the pension age as life expectancy continues to increase.

To varying degrees, many of the Mercer Index suggestions for China and India are matters which the superannuation sector in Australia has already grappled with.  The White Paper correctly identifies “regulatory reform” as an important national objective,[4] as well as a “greater mutual understanding of national arrangements and a better interface between our regulatory frameworks and those of our neighbours.[5]   

Regulatory implications

Although not perfect, the regulatory parameters which have been devised in Australia, together with the technological innovation, training and skill developed by service providers in the sector, can all be successfully packaged and exported to other parts of the region that are only just beginning to appreciate the significance of these issues for their retirement income systems.  Indeed, the White Paper acknowledges that our banking, insurance and managed funds sectors “are open, stable, efficient and well regulated following decades of reform to deepen them, strengthen their resilience and make them more attractive to foreign investors.[6]

There are obvious hurdles which may stand in the way of an easy transplant of features of Australia’s retirement income system into China and India.  However, this underscores the significance of calls for important reforms mentioned in the White Paper and in industry circles such as the Asia Region Funds Passport; the need to better manage global financial risk; and the importance of harmonising global financial services regulation as much as possible to lift “regulatory burdens or barriers to greater financial market integration across the region.[7]

Regardless of the financial services regulatory system adopted by countries in the Asia-Pacific region in the future, it should contain certain minimum qualities. It must be efficient, meaning that it regulates the financial sphere without unnecessary inefficiency. It must be effective without being a hindrance, meaning that the financial industry operates within prudently defined boundaries, but is not regulated to the point where operation becomes difficult. Finally, it must be tailored to the industry.  As reflected in the White Paper, this is best achieved via extensive consultation with industry to decide what type of regulation is necessary and what is simply burdensome, and the measures which need to be implemented to achieve that regulation.  Whatever the model of regulation, if it bears these qualities, it will likely be a regulatory model which can carry the Australian financial sector and the rest of the Asia-Pacific region comfortably into the future.

The benefits of a two-way street for Australia’s managed funds industry

Expanding Australia’s role as a leader in the managed funds industry has the potential to enhance its role as a powerful and sustainable economy in the Asia-Pacific region.  Following the release of the White Paper, a greater focus in the Asian region on the strengths and abilities of the Australian superannuation system (including the many intermediaries and service providers in the system) has the potential to produce a positive impact beyond our borders.

The White Paper seeks to “build on the strength, stability and competitiveness of Australia’s financial system[8] and to promote the recognition of Australian managed funds which are growing at an exponential rate.  This is bound to be a rewarding venture for Australia and its managed funds industry.  Exporting Australia’s successful retirement income system to our neighbours in the region and encouraging complimentary financial market regulation will ensure that the opportunities of the Asian Century are driven along a two-way street with benefits flowing to and from Australia through integration efforts such as the Asia Region Funds Passport, tax reform and attractive infrastructure financing opportunities for superannuation funds.


 [1] The superannuation sector is underpinned by compulsory employer contributions which are set to gradually increase from 9% to 12% between 1 July 2013 and 1 July 2019.

 [2] Commonwealth of Australia, Australia in the Asian Century White Paper, 28 October 2012, p 1 (hereinafter referred to as the White Paper).

 [3] White Paper, pp 7-8.

 [4] White Paper, pp 150-152.

 [5] White Paper, p 209.

 [6] White Paper, p 158.

 [7] White Paper, p 159.

 [8] White Paper, p 14.




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Michael Chaaya

Partner. Sydney
+61 2 9210 6627

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