This article suggests Britain shouldn’t wait as Australia has.
This article is about what we can learn from Australia about “choice architecture” and how we can avoid leaving the important policy decisions too late, as I believe the Australians have done.
As she learns the ropes, I hope that new pensions minister , Laura Trott is being encouraged by Guy Opperman, to look at the Australian DC market for policy clues. If so, she might find this article useful.
There are just over 3 million Australians currently aged 55-64 and approaching retirement in the next decade. In 2021, around 65% of retirees had less than $250,000 in super ‘at retirement’ but this is expected to quickly reduce to about 30% over the next 10 years. By 2031, almost 50% of retirees will have more than $500,000 in super.
Research suggests that in Australia, a quarter and a half a million dollars are “triggers” to getting people up the ladder of engagement.
But in the UK, DC asset balances are much smaller and , save for those who have the financial capability to find advice or self-advise, many savers are not at all aware of their options and either roll up their savings or cash them out. The mess we are getting ourselves into is evident from the FCA’s Retirement Income Study. If anything, retirement decision making for people with pots in occupational pensions looks like being even worse.
So what can we learn from our cousins down-under?
Belatedly, Australian policymakers have decided that the sole purpose of DC savings should be to provide a retirement income.
At a recent conference, Stephen Jones, of the Australian Treasury made a blunt statement
“We can’t get everything settled for the long term unless we have an understanding of what we are trying to do”
Speakers were asked to come up with a mission statement for DC. This is what came out of the debate. The job of the Superannuation System was
“To provide income in retirement that helps all Australians to live with dignity, by supplementing or substituting the Age Pension.”
Laura Trott, our new Pensions Minister could do very well , to adopt that mission statement to the UK workplace pension system.
Providing dignity for those who don’t do pensions
A long time ago, a wise American told me that the US had “given up on making every saver their own CIO“. Most people – the world over – want a “done for them” approach. But even if you bought a driverless car, you’d still want to know where it was taking you.
The question Australians are struggling with, is not the “product”- as the title of this blog suggests, there is plenty of product – the issue is getting people onto the ladder below and far enough up it for them to feel that their savings are rewarding them with a retirement that gives them “dignity“.
The conclusion is that the higher your DC balance, the further up this ladder you are likely to go. There will unfortunately be many people, even with pension dashboards who will never engage with the retirement process and it may well be that a default mechanism is needed so that (say at state pension age), their pension pot is defaulted into a retirement income plan that does the income for them. This could be an annuity, it could be a combination of drawdown and annuity (flex and fix) or it could be “decumulation CDC”, but the main feature of any default is it has to meet the purpose. Let’s think of the sole purpose of a default as being
“To provide income in retirement that helps all Brits to live with dignity, by supplementing the State Pension.”
Providing support for those for the “pension aware”
I believe the Australians have waited too long to establish their “sole purpose”. It wasn’t till February 2021 that APRA (their TPR and FCA) issues this directive
“The sole purpose requirements contained in section 62 of SIS (the “sole purpose test”) limit the provision of superannuation benefits by regulated superannuation funds to a range of prescribed or approved retirement or retirement related circumstances. The test is the legislative expression of the retirement income objective which is the key rationale for superannuation savings.”
The range of prescribed retirement circumstances differ of course by personal circumstance. Some of us have families, some not. Some of us have independent wealth to provide us with “dignity” while others will have only the state pension or pension credit.
But most people are looking for their own retirement plan which has a chosen lifestyle supported by a financial plan that makes it possible.
This is where people climb the ladder and Deloittes provide us with a helpful series of insights as to how the mass of retirement savers can better make their way up it.
Meeting the “common challenges” may mean climbing to the top of the ladder and getting advice or may mean using technology to work things out independent of an adviser.
Getting the order right
There is a temptation to design choice architecture in the UK which focusses on the pension aware and this is what we are currently falling for. We are relying on savers to move up that ladder, access technology , take advice or follow investment pathways.
But most people aren’t taking the steps towards the right decisions because they are not aware.
These people need a “done for them” product
“To provide income in retirement that helps all Brits to live with dignity, by supplementing the State Pension.”
Once that is in place, tailoring the product to meet personal solutions becomes much easier.
The default solution has to be an income that lasts as long as we do and provides us with the dignity in retirement we are after.
Choice architecture – such as the investment pathways – can flourish once the default is in place. Right now , our choice architecture is not grounded in a common purpose and there is no default solution for people who just want their workplace pension to provide them with a pension after work.