Back in the early 1990s, when former pension reform regulators like me were shaping Australia’s plan to embrace compulsory superannuation coverage and employer/employee contributions, English trust law was seen as the mechanism that would enable this endeavour. Politicians and civil servants in the land down under were also aware of the growing pension mis-selling issue in the UK and the Maxwell case, and were keen to learn lessons from both.
Fast forward 30 years and the reverse is happening. Rather than regulators here learning from the UK we see politicians and civil servants in the UK looking more carefully at the Australian experience of pensions.
When it comes to pot-for-life reforms, there is the assumption that what has happened in Australia won’t be exactly mirrored in the UK. ‘It won’t happen like that here’, seems to be the mantra. This might be correct, but the notion that the Chancellor of Exchequer articulated elements of the Australian superannuation model, in a selective manner is worthy of examination. Some features are worth noting.
Australia is facing a transition of administration when it comes to superannuation funds. Scale and consolidation, along with the use of blockchain and the departure of existing providers is seeing trustees focusing more on this aspect of superannuation operations. Scale and costing differentials will shape the outcome in the future, especially towards small pots.
There is also a stark difference in the regulatory landscape in Australia, with regulatory intervention coming from APRA and ASIC.
Australia’s equivalent of value for money (VFM) regulations, sees regulators writing letters directly to plan members if their scheme underperforms. If nothing changes, then members will be contacted again to inform them that their fund is performing badly and will not onboard new members. At the same time the regulators are being more prescriptive on the consolidation of funds through AUM sizing. Large is considered beautiful because of the economies of scale that can be generated. Consolidation is actively encouraged and small fund trustees are asked: why do you exist?
Structuring the default investment option and stapling the member to the original fund remains contentious, with some hospitality and retail funds being considered to have an unfair advantage in attracting new members. The Cooper reforms of a decade ago are viewed as not having time to bed in. At the same time legislated contribution levels from the employer will increase, eventually, to 12 per cent, with voluntary contributions averaging at 3 per cent. As such the $3.5 trillion in AUM is likely to double in the next 5 years and these funds need somewhere to go – and it’s not all in Australia.
The Chancellor of the Exchequer sees a monetary advantage in encouraging pension investment into certain areas, for example using funds to try to help decarbonise the economy. Equally ‘recycling’ inner urban assets to make British industry more competitive – roads, telecommunications, airports and to serve the Northern powerhouse are recognised. There is a political dimension to all this. But there is no easy fix and will the trustee be asked to do more and be regulated more heavily as a result, as we have seen here in Australia?
Finally, the retirement covenant suggests clearly that Australia is underserved by innovative retirement income solutions with the regulators suggesting in analysis: ‘industry could do better’. Australia fell out of love with defined benefit schemes and the actuarial science needed to create advanced income solutions. But this feature of the Australian system is now being looked at again. Simply building up member superannuation pots is not enough.
Historical performance in addressing social and economic issues is a key to all politicians and civil servants alike. No one country has the monopoly of pension success but that is not to say we shouldn’t look, visit, and learn.
