I went to a discussion on the Australian retirement savings system at the invitation of the Australian actuarial group in London (thanks guys). The talk was excellent as were the questions. Being neither Australian or an actuary it was an eye – opener!
Australia thinks it is going in the right direction on pensions and most people I speak to who are in the Australian “Super” system, are proud of it. This is very different from the UK where everyone is moaning about pensions.
With such an attitude , I was hoping for some answers to our pensions woes, I am afraid I didn’t get answers – just a different set of questions.
The question I had for the meeting (which I didn’t ask) was whether the Aussie optimism was justified. I am sorry to say, I think they are self-deluded.
The Australian pension system has around $1.4trillion dollars invested in it, retirement money exceed GDP and are forecast to increase to 130% of GDP by 2035.
Compulsory contributions to Super are due to increase from 9 to 12% between now and 2020 leading to healthy retirement balances for all those within the employed workforce.
The money flows into five types of funds
- Retail mastertrusts $310bn in 135 schemes
- Industry mastertusts $265bn in 55 schemes
- Self managed funds (SMSF) $440bn in 480,000 schemes
- Corporate pensions $55bn in 120 schemes (DB)
- Public Sector $220bn in 40 Schemes (DB)
Retail mastertrusts are run on a for profit basis and have a stable membership they are not growing and indeed may be shrinking as the retirement wealthy shift money into SMSFs
Industry funds are promoted on a not for profit basis, usually by employee organisations such as unions. They are growing and they claim to be returning 1.5% pa more in returns than their for-profit counterparts.
The SMSFs are growing fast, typically established by the accountants of the wealthier population and advised on by regulated individuals, these are closer in design and governance to our personal pensions.
Corporate DB pensions are in terminal decline unlike Public Sector DB plans which , as in the UK, are the principal source of DB funding.
With the exception of the Corporate and Public Sector plans, Australian “Super” funds are retirement savings plans and not pension plans. The decumulation of capital is an amateur affair with no compulsory annuitisation and little use of voluntary annuities.
The incidence of double-dipping, the practice of spending your funds as quickly as possible to fall back on the states, does not seem to be a problem. This despite the state pension scheme being linked to an index 1.5% higher than CPI, being means tested and providing a relatively generous benefit even today.
Nor does there seem any real focus on “efficiencies”. “Super” for all its scale – is not cheap. Unless it is accounting for its charges on a radically more transparent basis than we are, it is more expensive than UK DC. No one seems too worried about this – a sign for me of a nascent and not a mature governance system.
My impression is of a pensions system generally in its infancy, that believes in itself because it has not been tested. The recent Cooper Review recommended a strengthening of general governance, an improvement in reserving (against risks of failure), greater scrutiny of default funds and a code of conduct for Financial Advisers focussing on “best interests for members”.
But on the bigger issues surrounding decumulation and the preservation of capital, Cooper says little.
It seems unlikely to me that Australians will be able to manager their retirement wealth sensibly enough to properly meet their financial needs. Reports that 50% of the money that has flowed into self-managed funds sits in cash suggests that the Australian version of “Homo Economicus” is no more financially advanced than you or I.
More worrying for the long-term finances of the Nation were statistics reported from RIMS an organisation that provides the Government with statistics on inter-generational issues.
While it appears that the replacement ratio for retirement income is high, little has been done to confront the social costs of meeting the demands of an aging population (set to double from 1 to 2% of GDP in the next twenty years. Nor the even higher costs of healthcare for this group (rising from 5 to 9% of GDP in the equivalent period.
My conclusion is that the Australian “Super” system has not solved the problem of an ageing Australian population, it has just pushed the problem into another corner. The big structural issues are yet to be solved.
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