Selling pensions by the sausage not the sizzle!

“Economies of Scale” sizzle with buzzwords like “impact”, “productivity” and growth, but in Australia, big is best where “big” is defined as the size of pensions people get.


There’s an interesting debate going on in Australia about what sells Super. Super is the Australian system of delivering retirement income from workplace savings (it’s short for Superannuation) – a pension paid to a retired employee who has contributed to a fund.

On the one hand , there are pension specialists like my Australian actuarial friend Jim Hennington who has shared this chart with us.

(For a fuller explanation, I’ve included Jim’s full post at the  bottom of this blog)

Here is an extract from Jim’s explanation of what this chart is showing Australian savers

For the moment , let’s focus on the message that Australian Supers are now selling themselves as providing answers to people’s retirement living standards to members. In short, Super’s to the left of the chart are saying, bring your assets to us as we’re doing best for our savers in getting them up to scale (the thick red line). It’s a “we’re big – we’re beautiful” message,  which suggests that the smaller supers, to the right of the chart, will be part of the larger ones, before too long. This is the kind of economy of scale that Australian savers take on board.

If people buy scale in this way, then we should take note. It suggests that average pot sizes matter a lot more than we think.

Pension tension among  private savers

The article Jo Cumbo highlights,  questions whether the purpose of “scale” is to build the great retirement product Jim talks of , or to provide the Australian Treasury with a means to provide affordable housing (to all – including Australian pensioners). To quote two salient paragraphs from Jessica Evans of the Sidney Morning Herald

I have serious doubts about the wisdom of using super to bankroll affordable housing. Why? Because the overriding responsibility of all super funds – enshrined in legislation – is to act in the best financial interests of members. In simple terms, to grow member funds by the maximum possible and deliver them the biggest possible nest egg for retirement.

And she’s not afraid to have a go at Super investment managers for pandering to Government rather than protecting their savers

Our increasingly bloated super sector has, of course, little incentive to downsize itself. Instead, it has every incentive in the world to sit around and dream up new and increasingly novel ways to reinvent the investing wheel by getting into ever more exotic and obtuse asset classes, like, say, affordable housing.

Great retirement products from economies of scale

The Value for Money debate in the UK assumes that when master trusts like Nest , Peoples, Lifesight and Legal & General pass £20bn in assets, they can seriously invest in productive capital which is a win-win for Government and for savers.

The Government is also looking at Australia as proof of this. But it should take note of two lessons, one shared by Jim and the second by Jo Cumbo which are flip sides to the same coin.

There is growing evidence that Australian savers

  1. Prioritise Supers that build holistic systems that provide high retirement income
  2. Are wary of “bankrolling Government initiatives ” , prioritising the productive use of Super’s capital over maximising saver’s VFM.

Don’t take pension savings for grants.

Jo Cumbo has consistently argued that the primary purpose of a pension plan is to provide a pension and she will be heartened to see Super’s vying with each other to show who is doing best at meeting their saver’s pension needs.

Jo has also argued that its pensions first, impact second and that the primary argument for investing in productive capital must be to improve the value people get from their pension savings. Super’s shouldn’t be providing grants for social purpose.

At yesterday’s Pension PlayPen meeting with the DWP, FCA and TPR, the most consistently asked question from the online audience was why VFM did not include as a measure, the retirement income available for the money saved.

The DWP’s consultation promises this as stage two of the VFM Framework and point to work being done elsewhere in Government on initiatives to turn pots to pensions.

However, for a Government that claims it looks to Australia for inspiration in these matters, ignoring the pension and focussing on economies of scale to deliver VFM, may not be quite the VFM Framework , savers want.

Consolidation cannot be considered an end in itself, it must lead to better outcomes and simply saying “big is beautiful” will not cut it with commentators or consumers.

There needs to be a better case made for the inclusion of illiquid assets in workplace pensions.

We need to see evidence that scale leads to bigger holistic pensions and is not just a means to reduce Government debt and kick-start growth.



Appendix; a fuller explanation of Jim’s chart



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Selling pensions by the sausage not the sizzle!

  1. Pingback: Why we need to be patient about patient capital. | AgeWage: Making your money work as hard as you do

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