Superannuation at risk, economists say

Australia Broadcast Center

2 days ago

Annie Guest: Millions of Australians in or approaching retirement are potentially exposed to enormous financial insecurity. It's connected to the global bond market. That's where governments, corporations and financial institutions trade debt securities, primarily bonds. Our business correspondent David Taylor joined me earlier for more. David, what's at the heart of the concerns for millions of Australians in or approaching retirement?
David Taylor: Annie, I'll try to make this simple. Many Australians rely on superannuation nest eggs for their retirement income. Now, those nest eggs are made up of shares and bonds and things like that. Now, superannuation funds are heavily invested when it comes to shares in US shares. Australian share market is big, but not quite big enough to produce the sort of returns they want. Now, that's good news because Wall Street's consistently flirting with all time highs. So, you know, that boosts superannuation balances big time. But Annie, there are concerns that Wall Street now is vulnerable to a lasting correction or a big drop, a lasting drop in stock prices.
Annie Guest: David, what's the basis for those concerns?
David Taylor: Well, Australians are not the only ones invested in US stocks and bonds. The Japanese are too. And a problem may come, Annie, if Japanese bonds become an attractive place for both Japanese and Chinese and other investors to put their money in. Now, what I mean by that is investors are chasing returns. So, if the share market in the US on Wall Street is doing well, you get high returns. Go over to the bond market in Japan. If the interest rate on those bonds starts to rise, well, people go, maybe I should be investing in the Japanese bond market. And so, money is transferred from the United States and Wall Street into the Japanese bond market where they can get, where they can own a relatively safe security with higher returns. As AMP's head of investment strategy, Shane Oliver, explains.
Shane Oliver: Well, the basic concern is that the Japanese government lost its majority in the upper house elections on the weekend. That is leading to political uncertainty in Japan. It's unsure as to how long the Prime Minister will remain. That, in turn, is adding to risks that there will be some sort of fiscal easing and further expansion in Japanese government debt. And if that occurs, it will mean higher bond yields than we've already got in Japan, which of course will suck money out of the US and elsewhere back into Japan as investors unwind their so-called carry trades. And carry trades are basically situations where investors borrow very cheaply in Japan, put that money into places like the US, pick up a higher level of yield. But whenever there's uncertainty about the global economy or there's rising yields in Japan, then that money can flow back to Japan. And we're seeing a bit of that at present.
David Taylor: So is AMP concerned about a large volume of money in the event that money does end up moving from the United States to Japan?
Shane Oliver: Look, to be honest with you, we're not overly concerned about it, but it's certainly something we're monitoring.
Annie Guest: That's the AMP's Shane Oliver there. And the Association of Superannuation Funds of Australia, or ASFA, represents many superannuation funds. What's it had to say about this worry?
David Taylor: Annie, it might not surprise you that it's not concerned. It says it's not concerned. It expects that $450 billion US dollars will be directed to US assets over the next decade. It says that superannuation giants are well-placed to deal with the market volatility if it eventuates in any case.
Annie Guest: That's business correspondent David Taylor.