The Australian superannuation industry is set to change the way Australians save money. In a report by Australian Prudential Regulation Authority (APRA), superannuation now holds more of Australia's money than the big banks.
The total value of Australian super swelled beyond $1.62 trillion in the year to June 30, thanks to exceptional returns from fund managers and stock markets in Australia and abroad – their best return in 16 years. Investors took advantage of not only the markets returns but poor interest rates and tax incentives by investing through super.
Once again, Self-Managed Super Funds (SMSFs) controlled most of the market because more investors are refusing to let management fees take a toll on their earnings. Behind SMSFs' 31.3% control of the market, 26.1% of super was held up in retail funds. With the amount of mandatory super contributions set to grow from 9.25% to 12% by the end of the decade, we are likely to see more Australians taking control of their retirement by opening their own super accounts.
The rise in SMSFs may put pressure on traditional managers like AMP (ASX: AMP) but it could also be a game changer for our big banks. As more and more investors run from poor yields in term deposits, institutions such as ANZ (ASX: ANZ) and the Commonwealth Bank (ASX: CBA) may struggle for funding if they experience a large demand for credit from customers.
An investment alternative
Treasury has predicted the amount in super to grow to $6 trillion in the next 24 years. Specialist retirement company Challenger (ASX: CGF) had previously predicted that by 2030 we will see the Baby Boomers account for 69% of the retirement population and the entire superannuation industry to have more than $6 trillion. This seems plausible, particularly with the tax incentives and increased amount of contributions by employers.
Source: Google Finance
Challenger, which provides financial security for retirees through annuities and other fixed income streams, will be in prime position to take advantage of the rising amount of funds in superannuation. In its most recent full year report, statutory profit rose 180% but normalised profit rose 4%. The modest 4% increase is what investors would expect from this company moving forward but with more money entering retirement in coming years it seems the sky is the limit. In addition, the company pays a strong 3.9% dividend.
Foolish takeaway
Australia's superannuation environment will change how we invest and save money. More and more investors are taking advantage of the tax incentives by putting their money into their own super accounts. With interest rates so low and the share market outperforming, dividends have never looked so good.
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Motley Fool contributor Owen Raszkiewicz owns shares in Challenger.
