Partisan views aside, it may be that if there was an Ashes contest for retirement saving, the UK could learn a lot from Australia, where the Superannuation (Super) system offers decades of experience and lessons.
Chris Inman, partner at Aon and proud Australian, explains: “The UK’s Pension Schemes Bill has landed with many of its defined contribution (DC) aspects having already played out in Australia - I believe there are lessons to be learnt from that experience. Let’s start with some history. Australia’s Super system took shape in the early 1980s and has evolved through impactful, sometimes unpopular, reforms. Its strength today is the result of bold, focused decisions - and not overnight change. So, how is this useful for the UK market? These are key areas:
1. It takes time to get contributions up to a reasonable level
‘Default’ Super contributions are compulsory in Australia, there is no opting out, and they are paid for by employers. Members don’t need to pay in with the mandated/compulsory employer contribution at 12 percent today – it was phased in over time and paused several times due to different governments. The UK had an opportunity to set a decent minimum level as part of auto-enrolment but instead went with 8 percent. Making a change to that is not easy once it’s in place – but I believe it’s the right thing to do!
2. Small pots are a growing problem in the UK - that Australia has sorted
Australia’s Portability (members’ ability to select their own fund) helped reduce the number of small pots through ‘sweep-ups’. Since 2021, members are defaulted to an existing Super fund when changing employer – therefore future-proofing the system against small pots becoming a problem again.
3. Considered regulation over time can ‘weed out’ low performing funds
The Australian regulator pushed for consolidation in the industry in different ways. Big ones included ‘Super Licensing’ which was mainly based on improving governance practices and efficiency. Another was in ensuring that Super funds have accountability on performance and fees. The upcoming VFM framework in the UK is sounding similar to these. But the UK needs to watch out for herding behaviour and to get it right, then move on - constant tweaking will just erode confidence in the system.
4. Means testing leads to those who really need government support, receiving it.
This is always controversial in the UK - I’ve been surprised by the pushback when raising it. Maybe my more modest upbringing makes me more inclined to see the positives in means testing but the fact that Australian government spending on state pension provision is projected to decline - in contrast to most OECD countries - makes Australia one of the world’s most financially sustainable pension systems. I think it’s hard to argue with that. One downside is that it can be complex and difficult for retirees to know what they will receive. That said, it’s simple compared to what UK retirees face.
5. ‘Emergency’ access is bad!
A real-life example was Australia’s Covid Early Access Scheme That saw lump sum withdrawals double in 2020-21 among those not retired. It was largely taken up by lower income earners and those with lower pot sizes – and put a significant dent in their long-term retirement savings prospects. A knock-on effect from this saw some Super funds having to sell assets, including private market assets, with a detrimental effect on performance.
6. Incentivise DC schemes and make attractive private market assets available
The average Super displays a decent investment into infrastructure and real estate. That’s for their potential inflation linkage and strong cash flows, but also the virtuous circle of investing. A local infrastructure project creates jobs in the community, increasing economic growth and providing returns for Super members who benefit from the extra jobs, higher growth, and so on. This is a positive message that the UK could push if it wants schemes excited about investing locally (maybe along with a few monetary incentives!). There’s also been talk about investment in the UK into private equity and venture capital - but there’s very little in the portfolio of Supers. This is mainly due to scepticism about complex fees, the value they really add and fair sharing of returns with investors. It’s based on years of painful experience, especially during and post- the global financial crisis.
“This winter’s Ashes clash could be very even, but – bias aside – I think the Aussies are well-ahead in key areas of DC pensions – and the UK can learn from their experience.”
|
