A vision of a wealth based retirement is not mine!
I am reading the work of David Orford , Stephen Huppert and Optimum Pensions who have kindly shared their blogs for us in the UK.
The view in the UK is that Australia has got its retirement system sorted. This is primarily based on a tough compulsory system for saving for retirement. It is not based on satisfying a need amongst ordinary people to have an income when they stop working.
In this study of Mercer’s comparison with other countries,there’s no mention of the UK, instead we have countries that are delivering top “index rates”. What can be seen is that this is not the focus for the Australian Super system.
The major failure identified by the Super system is that it offers wealth but not income. Read the excellent blog by Huppert and Orford and you will find an analysis of Super as a system that delivers wealth but not income. This has been promoted by a range of Australians to the UK over the past two decades. Most vocal has been David Harris and he has introduced people who would like retirement to be a wealth system.
Governments have taken up wealth as the measure of success and this has played nicely into the hands of the wealth management industry. We are now seeing UK master trusts and SIPP managers rehearsing Australia as a model to follow.
But this is not a good basis for the UK. We do not benefit by having our wealth in retirement being promoted as a target. £100,000 currently produces an income of around £5,500 when purchasing income of quality comparable to what is offered by a defined benefit works-based pension and rather less when compared with the state pension.
Most people trying to retire, have less than £100,000 in retirement savings and after taking a quarter “tax-free” they aren’t well based to replace investment. They are told to go to a wealth manager but are likely to be rebuffed because they have not saved enough.
The problem has been handed to the large insurers, SIPP providers and to the mastertrust industry who simply think of pensions as the accumulation of a mysterious pot which we should trust.
There here has been no challenge to the presumption that we increase contributions into the “wealth management” system, run by the DC managers and end up alright.
Here is the challenge. Read what Orford and Huppert are saying and realise that what they are considering is good is not what the UK is offering. What we are offering needs a redesignation even more than the Australian system.
This is why I am pleased that this Government is not assuming that we will sort our retirement income sorted by increasing the feed to the wealth management industry. Instead, Reynolds and behind her the Treasury team led by Reeve are asking more important questions about how the system works for those who can’t run their retirement from a mysterious pot (with the help of experts called wealth managers).
What follows has been donated to this blog; thanks David and Stephen and your colleagues
The Mercer CFA Institute Global Pension Index (the Index) has been comparing global retirement income systems for 16 years. The 2024 edition of the Index has been released, awarding an A grade to four countries: Netherlands, Iceland, Denmark and Israel. It rates these retirement income systems as first-class and robust in that they deliver good benefits, are sustainable and have high integrity.
The Index rates Australia’s retirement income system as B+, indicating a system with a sound structure and many good features but some areas for improvement to make it an A-grade system.
The overall index value is the weighted average of the three sub-indices: adequacy, sustainability and integrity. Mercer gives the highest weighting to the adequacy sub-index as adequate retirement income the primary objective of any retirement income system.
The adequacy sub-index considers the benefits of the current pension systems and assesses several important system design features, including the requirement to take part or all of the retirement benefit as an annuity or income stream.
This is where the Australian retirement income system has fallen short.
Australia’s Performance and Areas for Improvement
Dr. David Knox, Mercer senior partner and lead author of the Index Report, commented on Australia’s B grade rating on the adequacy sub-index: “All but one retirement system in the Global Pension Index’s top 10 has a focus on income in retirement. Australia is the exception. Greater encouragement of retirement income streams will give aging Australians more confidence to plan, spend, and in turn, improve their wellbeing in their golden years.”
Mercer made several recommendations that could increase the overall index value of Australia’s system:
- Moderating the assets test on the means-tested age pension to increase the net replacement rate for average income earners
- Introducing a requirement that part of the retirement benefit be taken as an income stream in most circumstances
- Introducing a government superannuation contribution to primary carers of young children
- Introducing a requirement to show retirement income projections on members’ annual statements
Sharpening the Focus on Retirement Income
The global landscape of pension systems is rapidly changing in response to increasing life expectancies, declining fertility rates, and evolving beneficiary expectations. Defined contribution (DC) pension plans have been gaining importance at the expense of occupational defined benefit (DB) plans, shifting the responsibility for complex financial decisions to retirees who often lack sufficient financial literacy.
The Index Report emphasizes that the primary purpose of a retirement income system is not merely the accumulation of wealth. It recognizes that everyone’s needs are different in retirement, even for retirees with similar retirement balances.
The purpose is retirement income, not the accumulation of wealth
The Index Report points out that the primary purpose of a retirement income system is not merely the accumulation of wealth. It recognises that everyone’s needs are different in retirement—even retirees with similar retirement balances might have different preferences and requirements.
It calls out that superannuation/pension funds play an important role to play in designing the best retirement products and makes the following recommendations:
- The focus must be on providing a regular income during the retirement years (not just a lump sum).
- Retirees need some long-term protection from future risks.
- Cognitive decline during the later years of life needs to be recognised
- Some flexibility is required in the benefits permitted
- Retirees need help, guidance and advice.
Improving Australia’s Retirement Income System
To improve the ranking of Australia’s retirement income system, the government, superannuation industry, and financial advisors must work together to increase the availability and usage of products that can provide Australians with an income for life.
As David Knox states,
A focus on retirement income is the most significant improvement we can make to our system and the lives of Australian retirees as they live longer.”
***
Optimum Pensions was launched in 2017 with a single mission – to help Australians lead a comfortable retirement. The Optimum Pensions innovative retirement income solutions are specifically developed to address longevity risk and provide greater peace of mind for all retirees; no matter how long they live.
The Optimum Pensions, award-winning LifeSpan Calculator builds confidence around personal life expectancy and retirees’ possible retirement planning horizon.
We do really need a re-appraisal of the UK pension system with its current focus on wealth creation.
Originally it was clear that occupational pensions were exclusively designed to provide income in retirement or ill health for employees no longer able to work and their dependants. Hence it was appropriate to provide tax relief on contributions and investment income.
The Government’s review should assess whether the occupational pension system is currently working efficiently to meet society’s future needs.
I do have concerns over various current initiatives, including the Pensions Dashboard, in that they are perpetuating the myth that individuals should be seeking to maximise pensions wealth, possibly at the expense of retirement income:
* Should multiple defined benefit pension rights from different periods of employment be consolidated or transferred into a DC fund?
* Should we not be focusing on systems which provide the targeted or defined income in retirement, rather than encouraging consolidation into what will become average investment performing masterfunds.
Oldie, Thanks for that post. I agree with you that the Pensions Dashboard is a deviation from the real job of pensions and I’m worried that the efforts to erode DB include the promotion of DC wealth management over DB pensions. We know all about that but seem to have learned nothing.
In your recovery, Henry, please don’t be too cantankerous. Can’t be good for the blood pressure.
Richard Murphy, however, reminds us why this can nevertheless be a theme for today:
https://youtu.be/T30oDmMOn5g
Thanks Derek.
I would like to be a Stephen but not to die like one. I am very honoured by your sending this and think of you as a Stephen who has done rather more than I will ever do. I played your video to my mother who is 92 and I hope she recognised that I, like her husband – was doing what he could (though not as well as Dr G W Tapper)