With a couple of decades’ head start on the UK’s auto-enrolment system, Australia’s superannuation market offers numerous insights for British pension professionals. Perhaps most striking is just how huge the market will become – Australia has grown from £78bn in 1992 to £1.4trillion today, and with a projected growth rate of 8 per cent a year, on course to reach £3.1-3.6trillion by 2035. Hardly small change for a country with a population of 25 million.
The industry language is as positive as the inflows – where the UK has ‘pension’ and ‘not-for-profit’, Australia has ‘super’ and ‘for-member-profit’, verbal distinctions that can’t have harmed member engagement.
Hostplus is one of the largest supers in the country. Its group executive, member experience Paul Watson cites a number of areas where the UK can learn from the experience Australian providers such as Hostplus have alread been through.
One of the more intriguing narratives emerging from Australia is the idea that for-member-profit industry supers have performed better than shareholder-owned ones, the reason cited being that they have been more closely aligned with the interests of their members. Rather than having to pay profits raised from charges, the for- member-profit supers have channelled excess cash into a richer spread of assets, leading to better long-term performance. This in turn has attracted even more assets, says Watson, whose for-member-profit super serves the sport, hospitality, tourism and recreation sectors.
He says: “The empirical evidence, including that researched and published by our pension regulators and Productivity Commission, is unequivocal; well performing for-member-profit funds have outperformed the vast majority of bank-owned and other for-shareholder-profit, or retail, funds over medium to long-term periods.
“Over the last year a significant amount of funds and pots have been rolled out of the retail funds and into for-member-profit funds, especially large and well performed industry funds. In the three months to 30 June this year hundreds of thousands of Australians exited retail funds, seeing some Aus$20 bn (£10.4bn) moved to other funds. This added to an already well established trend that saw retail funds cede over Aus$32 bn (£16.6bn) in the year to the end of June 2019, with over half of these funds moved to industry super funds.
“Many industry analysts and funds anticipate that this trend will continue for the foreseeable future, especially as the major banks and other retail wealth companies seek to divest from wealth and insurance to focus on core banking products and affiliated services.”
This trend has happened against a backdrop of a Royal Commission in Australia into the banking, superannuation and financial services industry that found widespread misconduct. AMP was found to have charged consumers for advice that was never received, while NAB subsidiary MLC Limited had charged superannuation customers for services that had not been received.
While it is likely to be some time before any distinction in performance between not-for-profit and shareholder-owned providers in the UK is evident, if indeed it ever does, the Australian experience highlights the fragility of trust in financial services providers and the speed with which assets can move when it is lost.
Australia’s DC market in numbers
Aus$2.7tr assets (£1.4tr) – 3rd largest in the world by size
Represents 150 per cent of GDP
6.3m lost accounts in 2017, holding $18bn(£9.34bn)
Number of funds (2002) – Corporate 2,484; Industry 134; Public sector 76; Retail 254; Self-managed 227,000
Number of funds (2018) – Corporate 24; Industry 38; Public sector 37; Retail 118; Self-managed 600,000
Linked to this debate is the very British question of how much to pay for pensions – or put another way, whether price and value amount to the same thing.
Watson describes a clear polarisation in the Australian market between those funds whose principal competitive approach is their low fee and those competing on value.
“We are in the value camp. We offer 22 investment options to members, some of which are very low cost, but our flagship option is our balanced best ideas fund, which looks after 1.25 million Australians,” he says.
The Hostplus Balanced – Managed fund has delivered annualised returns of 9.36 per cent over the 10 years to 31st October 2019, ahead of its peer group. It has a high level of exposure to unlisted assets, including infrastructure (a considerable chunk of which is in the UK), property, venture capital and private equity.
To Watson, UK’s 75 basis points (bps) total charge, including administration, seems unnecessarily restrictive.
He says: “We would not have achieved what we have done if we had operated under a similar price cap to the UK. We have the runs on the board. TPR can look at Australia and see a lot of empirical evidence that shows the best performing funds are routinely those that have not just focused on their gross charge and that have included a level of unlisted assets within their portfolio. You can get a tracker for 7bps, but over rolling periods of 25, 15, 10 and 7 years, those that have done better have spent more than that.
“So as a casual observer, if the UK’s fee cap were reduced to 50bps, that would be a constraint on funds in terms of investments,” he says.
Watson says the Australian experience has led them away from the lifestyle or target date approach. While many in the UK believe that between 90 and 100 per cent growth assets is an optimal approach for investors with more than 20 years to go, Watson disagrees.
He says: “Our modelling, and experience, has been that in terms of a suitable all- rounder default option, a strategic asset allocation that is both broadly diversified and sums to approximately 75 per cent growth and 25 per cent defensive assets leads, when exercised over the entirety of a person’s accumulation phase of some 40 years, to an optimised, risk-adjusted, outcome that is superior to if that person had been glide-pathed from a high to low/ no level of growth over those decades.
“With people regularly enjoying periods in retirement spanning two to three decades, it is important that their post retirement asset allocation provides appropriate growth, especially in the early and more active part of retirement, and to generate growth for sustainable income generation towards the latter years. This is increasingly so in a ‘lower for longer’ yield world that will not see real returns above inflation return to the levels retirees have previously experienced for a very long time.”
While long-term data on the UK workplace DC sector is more scarce, Watson says Australia’s more mature industry shows lots of evidence in support of a balanced, diversified approach.
“Those pension funds that have delivered the best risk-adjusted net performance outcomes over rolling periods from 3 to 25yrs in Australia are heavily weighted to those that have adopted an ‘all weather’, well diversified, strategic asset allocation and broadly stuck to it. That’s been the realised experience of well- performed profit-for-member funds, such as Hostplus, and others that have traceable performance history of over 30 years,” he says.
Australian supers spend a lot more time talking about performance than their UK counterparts, particularly when the returns are as positive as they have been Down Under.
But Watson agrees that too much member engagement in the field of investments can be a double-edged sword.
“The Hostplus member who has done nothing through the downturn will typically have done better than those who made active decisions,” he says.
Australia has adopted a pot-follows- member approach, where employees are allocated a default option by the employer, but can have their contributions paid into the super of their choice if they wish.
So given Watson’s assertion that those who sat on their hands through the global financial crisis did better, has the Australian system made it too easy to switch?
“It’s both a good and a bad thing,” says Watson, pointing out that some investors will switch out of funds that have performed consistently badly for a very long time.
Many providers in the UK would very much welcome greater portability of pensions, not least because it would go some way to solving the small pots issue, but also because high quality active players could expect to suck in more assets. Watson says the goal is laudable but cautions that it can take time to achieve.
“It has taken 25 years to create the superhighway to enable this money to move around the system. One of the lessons we have learnt is that portability of money should be restricted until it can be done at a cost-effective and timely way.
“Five years ago, if you wanted to move your fund it would take around 90 days. Today a fund has two business days to move it. The system is called SuperStream, and it is a governance framework where everyone subscribes to gateways to make payments and to triage contributions to other funds. For any country setting up a good quality DC system, something of this order is a matter of hygiene,” he says.
Because Hostplus is a super fund for the sports, tourism and hospitality sector, which is where many Australians take their first jobs, it has an advantage in terms of attracting members, says Watson.
“This means we often have the first conversation with people, but it also comes with its challenges too,” he says.
While much of the talk is about what the UK can learn from Australia, the conversation is not all one way. The FCA’s investment pathway policy is seen as a positive response to the decumulation drawdown challenge that has plagued the Australian system for over two decades.
“One of the lessons the UK can teach us is about having several straw man pathways for people to use in retirement. We have a middle ground of saver for whom it is a serious concern as to how they are going to use their money.
“Australians are good at being the richest person in the graveyard. People reach late old age and find they could have enjoyed more of their money. We have people who die with more money in their pension pot than they started with. I think we can do a better job of giving them more options in retirement. I’m on a mission to get people to spend more.”
From a UK perspective that seems like a nice problem to have. By learning from around the world hopefully we can face problems like these sooner rather than later.