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.
- Australia pinnacle (Photo credit: Kenny Teo (zoompict))
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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As one of the founders of Australia’s superannuation system I don’t fully agree with your comments. The one thing that is clear in most Australian super funds are the charges. In the building and construction industry, a scheme jointly sponsored by the employers’ association as well as the trade unions, the charge is about 1.6% of contributions plus for the most expensive investment product the charge is 0.86% of funds under management – the cheapest investment portfolio is 0.13%. The contribution charge is probably a bit on the high side but that’s a peculiarity of changes made by the Howard government where an employer has to offer 5 funds to each employee. One way that the costs could be reduced is if there was a central collection mechanism. The Australian Tax Office could collect contributions together with personal income tax. This would reduce costs significantly but it would be interesting to see how the system went. There are mixed signals about the efficiency and effectiveness of tax administrations around the world collecting contributions.
The payout phase in Australia is a little bit complicated as there is both the “transition to retirement” and full retirement. The latter is effectively a programmed withdrawal which allows the retiree to avoid all the bad sides of annuity provisions.
Of course no defined contribution system anywhere in the world is perfect but I would be interested to hear which country’s d.c. system people would suggest as being better than Australia’s – perhaps Denmark but the two systems both public and private are very similar.
And by the way it might be worth pointing out that the system is non-contributory!!
Thanks – I still don’t think that Super is cheap- by comparison with the Dutch or even the big UK DC schemes , it’s expensive (BT and Logica DC members pay Standard life c0.10% pa for a “total service”. Dutch CDC charges are in the same region.
The Dutch is a good model for the Australians to follow as it represents a half way house between the Australian “cash balance” model and our individual annuity system. It’s effecient, popular and works (despite the gloomy predictions of GAD).
The non-contributory aspect is a bit “smoke and mirrors”. the 9% is effectively salary sacrifice as it results from collective bargaining.
I have a horrible feeling that Aussie optimism is more a result of Chinese inward investment “recession-proofing” the economy than because of Super’s especial merit. We’ll see how it lasts when the mining miracle runs out!
That said, at least you’ve got a nation behind your retirement system. If we can do the same then auto-enrolment will have been a success but it’s going to need some hard work from the pensions industry and pressure from bosses and members to move us on from where we are today (not the best place).
A slightly different stance on the issue – we had a very interesting talk to Teifi Whatley, Comms Manager at Sun Super, 2 years ago about how they communicate to 1.2 million members. The economies of scale and the positive commitment to running the business for their members meant that they had a robust, strategic and targeted comms plan in place, the staff and innovative thinkers to deliver it, and the return on investment if it went well. I wish we could half their effectiveness in UK pensions communications!!
Alex
I’m absolutely sure these guys are enthusiastic and comitted to get the best member outcomes- especially in the industry schemes- we should bottle that and use it here. We need to go beyond what they’re doing but keep the approach to comms.
thanks for the comment- had forgotten just how into super these guys are
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