Australia’s superannuation system has comprehensively tackled the issue of proliferation of small pots, leading to reduced administration costs and a single view of the entirety of the individual’s pension saving. When the UK government floated the idea of introducing a similar lifetime provider model it was met with steep resistance from a wide range of stakeholders, concerned at the distraction from other more pressing issues, as well as receiving support in other quarters.
One of the biggest challenges raised by the industry was that the Australian model would ultimately take the employer out of the picture, eroding engagement with schemes, leading to a levelling down of contributions and a reduction in employers investing in member engagement programmes to promote ‘their’ scheme.
That prediction appears to reflect the reality on the ground in Australia.
Employer role
In the UK, some, but by no means all employers have invested a lot of time, money and effort into their pension scheme, seeing it as a key element of their talent attraction, retention and motivation proposition. Many pay considerably more than the auto-enrolment minimum. If a clearing house model is adopted, and employers are sending contributions to multiple providers other than their own scheme, there is a risk they could become disengaged from their pension scheme altogether.
In Australia this has happened, with only a handful of employers contributing above the legal minimum. Where there are increased contributions this is a result of industrywide ‘awards’ – collective bargaining agreements between particular industries and the companies within them, and their unions, something that does not exist in the UK.
While adequacy is less of a problem in Australia, with contributions already at 11 per cent of all earnings, and set to rise to 12 per cent soon, there is no concrete consensus that the UK will go beyond 8 per cent.
“This is certainly a risk,” says David Knox, senior partner, Mercer. “It has already happened here in Australia. Most employers just see their pension as a fixed cost. Because it’s compulsory, employers are virtually out of the picture in Australia.”
Andrew Boal, partner, actuarial consulting at Deloitte argues that corporates still play a role in the Australian market, albeit nowhere near to the same extent as the UK.
“The large retail funds and some of the profit-for-member funds have corporate sections. And so they might give discounted rates to large employers in a corporate section of their funds. Australian Retirement Trust (ART) has a lot of large corporates in their fund. They have just taken on [mining firm] Alcoa, but every three or four years Alcoa is able to go and tender to see whether they want to continue with ART as their default fund.
“We run corporate tenders on behalf of employers and ART and Insignia and others will compete to win that account. To what extent that changes over time with stapling will be interesting. With stapling, the number of employees in the employer’s default fund may diminish over time and therefore the power of that employer may diminish with it.”
The impact of stapling, the new policy that sees workers automatically stay with their existing super fund when changing jobs, unless they actively choose an alternative, on that dynamic remains to be seen.
Boal describes a corporate client that years ago had 90 per cent of their employees in their default fund. “I asked, when will you as an employer lose interest in superannuation? When it gets below 80 per cent, 60 per cent? They said, we’re not sure but if it got below 50 per cent that would show the majority of our employees don’t like our superannuation arrangement, so why are we bothering. I know of one employer who has recently decided to change its arrangements because less than 50 per cent of their new employers were joining their default.”
Switching behaviour
Australian savers have the right to switch to whatever scheme they choose, although the reality is that only 3.5 per cent of assets switch provider every year, according to figures from APRA.
Switching in the Australian market is not solely based on the quality of the provider. The fact that schemes include disability and death-in-service cover within them, at different rates depending on different professions, often influences decision-making.
Dan Ellison, general manager, strategic development at Link Group points out that some people stay with their provider because of the life insurance it offers. Some industries will have richer death-in-service or disability insurance bound into the products offered by their super provider, cover that some individuals are loath to give up. Ellison says: “Historically some of the group life policies have been more generous and so there has been a case where moving out of old policies would have been detrimental.”
Duplicate accounts are technically not allowed in Australia, except where they are held to retain insurance cover.
In Australia every provider has to have one single default in their MySuper product – while the UK has defaults designed for particular workforces. The hierarchy of choice on joining an employer is firstly the employee can choose. If they don’t choose an account, the next priority is their contributions will automatically be paid into their largest existing account. If they don’t have an existing pot then the employer’s default is used.
The funds chosen by employers are often the one typical for their industry – for example hospitality employers using HostPlus, or retail workers typically get enrolled into Rest Super, although this is not binding. In the UK a similar policy could see a large proportion of savers stapled to big auto-enrolment providers such as Nest.
Boal adds that the administration of the stapling solution is far from solved yet. “At the moment the employee has to provide the employer with all the details about their staple fund. So a lot of employees are still going into the new employer’s default fund because it’s easier to tick that box than fill out the paperwork,” he says.
Employee engagement
Australians certainly seem to know about their super funds, which are, after 32 years, part of the furniture. But are members engaging with them meaningfully?
Danielle Press, a former regulator, says engagement with Super funds has not changed for years. “Every survey that’s done on member communication and member engagement basically says there’s about 30 per cent of the membership that’s engaged. And that just hasn’t shifted for two decades,” she says.
So are Australian Supers investing in the sorts of engagement tech that is used by Facebook or Amazon? “I’m not sure they’re sophisticated enough to get there. Let’s get the basics right before we get to being really smart on communication,” says Press.
Dee McGrath, Link GroupDee McGrath, chief executive, retirement & superannuation solutions at technology provider Link Group says: “In the early days there wasn’t a lot to engage with. There was a step change in engagement when Covid hit because the government used superannuation as the first economic line of defence, opening schemes up to take two rounds of AUS$10,000 for people whose income was impacted.
“There was a lot of coverage, in part because of the increased fraud by crime syndicates offering to help people transfer the money at that time,” says McGrath.
In Australia it is rare for employers to pay more than the minimum. Some industries, such as the university sector, have ‘awards’, which are collective agreements driven by unions, whereby that sector has a greater contribution, but it is not employer-specific, and these are often closed to new members.
But McGrath says: “The education of the end consumer has driven enough financial literacy around their superannuation and their salary package to ensure that employers have been focused on providing a very strong superannuation offering to their employees.”
So how do employers going about their selection process?
“This is twofold,” says McGrath. “The larger companies would have a governance committee set up internally and an HR function to review offering, or they go out and use one of the advisers.
One concern of providers operating in the UK market is that a pot for life model will see all the lucrative customers with large pots and contributions going to a different provider, leaving mass-market players with smaller pots with less resource to invest in their proposition. The current cross-subsidy of members under the employer chooses model benefits those with smaller pots, but this could be lost, some UK providers have suggested.
Competitive market?
One challenge often put to the Australian lifetime provider model is that it does not face the competitive pressure of a consultant, representing an employer with tens of thousands of employees, running a tender process that requires providers to pitch their absolute best price, and ensure their all round proposition, beyond costs and charges, is going to deliver good member outcomes.
Boal argues that the scale of the providers drives efficiency through their purchasing power, which extends into the tens of billions of dollars. “They have even greater purchasing power than a corporate would. And the regulator is keeping a watch over their costs.”
This however raises a key difference in the two systems. The Australian system is populated by providers that operate on a profit-for-member basis, which means they are on the member’s side, and will pass on all these efficiencies to members.
The UK market is dominated by for-profit providers, and so, with a few exceptions, if a provider manages to negotiate a keen price on its cost of, say, asset management and administration, it will use this cost efficiency to both reduce its charges to the extent it needs to in order to remain competitive with other providers in the market, and also to boost its own profits.
In the UK, in the absence of the very stringent regulation of defaults and providers that Australia has built up through its tech-enabled, simpler system, a question remains as to who would protect the interests of the individual.
Michael Berg, principal, investing & superannuation advisory at Deloitte spent nine years in the UK working for LCP. He says: “For a pot for life to work you need effective selection of funds, which are subject to a lot of accountability around licensing and performance.”
Boal says: “Competition in the system comes from the investment performance test. This is calculated net of fees, so if you are a smaller, less efficient fund and you charge 20 basis points more than the median, you are already behind in the performance test, so your 50 basis points margin has now been reduced to 30.”
While proving an effective driver of costs, this approach does focus on investment return and charges, at the expense of the other factors included in the government’s VFM initiative, as well as factors yet to come in scope, such as decumulation functionality and offering.
That said, the Australian system is not burdened with the wide range of levels of decumulation functionality evident in the UK, where a majority of multi-employer DC providers cannot accommodate protected Lifetime Allowances, almost half do not offer drip-feed drawdown, a quarter do not offer flexi-access drawdown and one provider, Now: Pensions offers none of these, nor partial withdrawals from age 55 of any form. For more detail see the Corporate Adviser Intelligence Retirement Report 2023.
Press says: “There is an awful lot of inertia in the Australian market. There is competition with respect to price of investments and creating low fee products, and to make sure that size matters. People don’t want to be the fund that’s shamed on the front page of the Financial Review. But when you think about members actually moving, they don’t. I don’t think it has changed consumer behaviour. If we think about the global financial crisis and Covid, even though people have 100 per cent flexibility to change their investments they don’t on average.”
Charge pressure
Boal says: “Overall charges are coming down to under 1 per cent now, having been about 1.4 per cent a decade ago. This sounds high to UK ears, given charges domestically have got as low as 20 basis points for everything.”
Boal’s analysis shows Australian Super charges 12 basis points for administration and UniSuper charges 4 basis points. So where does the rest of the 1 per cent charge go? “Asset management fees. But from my perspective they’re almost irrelevant because what you should be measuring is your investment performance after costs. Yeah. And so some of those costs like for the industry super funds, their investment costs can be higher because they’re investing directly in infrastructure assets which are more expensive to invest in. But they give you a better return,” says Boal.
That is in contrast to the UK where some providers have been pushed as low as 20 basis points, or even lower in some circumstances, through competitive employer-sponsored tendering processes.
Union role
Where there are increased contributions this is as a result of industrywide ‘awards’ – collective bargaining agreements between particular industries and the companies within them, and their unions, something that does not exist in the UK. In the UK the unions have been virtually silent on defined contribution pensions, save for some expressions of support for collective DC. Nine of the 14 biggest Australian super funds are union-based funds, according to industry estimates, with board membership consisting of a proportion of union members, typically between a third and half of members.
Press says that she was concerned about a cosiness between unions and the funds serving them 10 to 15 years ago, although funds have improved, driven by pressure from the regulator.
Australian’s Productivity Commission investigated this relationship and concluded their selection by unions was not a particularly competitive process.
It had recommended a two-stage process. Firstly, the creation of a new industry group to create a merit-based selection of 10 funds, which individuals were either randomly assigned to or could choose. This shortlist was to be selected by some high profile figures. Then there would be the stapling model.
“The best in show got put aside, and they kept the stapling model,” says David Bell, executive director of the Conexus Institute.
Bell gives his perspectives on the stapling model, preferred by the UK government, where the pot you join you stick with for life, and the pot-follows-member model where the pot moves with you to your new employer.
“There are strong merits for both. But if you don’t have confidence that the first fund people are going into, you don’t want members sitting in a weak fund their whole lifetimes. You have to ask have you got enough good policies in place which ensure a good universe to start with,” he says.
Connexus Institute investment researcher Geoff Warren highlights the concern at the lack of an advocate for the member in UK contract-based schemes, which are where the majority of UK DC assets are currently held, and which are tied up in a legal quagmire that means there is little scope for providers to improve investment strategy for fear they could face legal action in the event that performance proves to be worse.
“Here it is much more of a fiduciary relationship,” he says. “We already have a class of funds which, because they’re mutuals, don’t have the profit motive sitting behind them there. And there’s all these layers of regulation over the top as well.”
Warren also argues the regulator has played its role. He says: “Regulatory requirements have been ramped up considerably in Australia. A lot of the mergers are driven by trustees in smaller funds just throwing their hands in the air and pushing the stop button.”
Bell adds: “There have been cases of good performing funds that are not of scale that have decided that they’re going to have to merge. Qantas Super is a perfect example of that – one of the top performing funds over the last 10 or 20 years, putting up their hand and saying ‘at our scale, we’re going to have to merge’,”
Boal thinks retail funds – which in the UK would be shareholder-owned providers – have a challenge remaining keen. “One of the questions is if the big retail funds are running for profit, how do they compete with the not-for-profits? Do they have to therefore be bigger and have more scale and be more efficient in some way to compete?”
Self-managed supers
One question UK policymakers will need to consider, if they press ahead with the policy, is whether to allow a pot for life model to require employers to send contributions to pension providers other than authorised master trusts or GPPs. In the UK this would mean sending contributions to Sipps or SSASs, akin to the ‘self-managed super funds’ of Australia. The UK government would have to decide whether it wanted to regulate all of these funds too, to ensure members were receiving good outcomes and not being ripped off on charges, given the current charge disparity between those in the embrace of institutional pricing in workplace schemes and those in UK retail funds. Fraud management would also need to increase to protect members from scams and outlandish investment propositions.
Retirement income covenant
Australia faces most of the same challenges in the decumulation space as in the UK, with few apparent solutions. The retirement income covenant is a newly enacted legal requirement for providers to look after members going into retirement.
Much of the energy is focused on changing the mentality from lump sums to incomes.
In 2022, 63 per cent of people retiring that year had an account balance of less than A$250,000. By 2042 that will have fallen to around 25 per cent of people, according to figures from Deloitte.
Boal thinks maybe only the biggest four or five super providers in the Australian market will be big enough to have their own decumulation product. “Everyone else should probably just use insurers’ products and guide people into them,” he says.
Bell says: “When you go into retirement, it shifts to generating income for members with totally different needs and wants. It then becomes more about personalisation, tailoring, almost a retail type of venture and that lends itself to being done at scale.”
David Orford is managing director of Optimum Pensions, after formerly chairing Financial Synergy, which was absorbed by IRESS Super. He was the second-fastest in the world to qualify as an actuary. “I beat all the poms, all the Americans and all the Canadians. I finished in two years and nine months. And the guy who beat me lives in Melbourne.”
His company is one of a handful of providers targeting the currently underserved retirement income sector in Australia, with a unit-linked annuity solution.
“The only risk to the annuitant is the investment performance gained or lost. The mortality gain or loss are borne by the reinsurer,” says Orford. “Our annuity market is developing very slowly – we’re used to a lump sum in retirement, a lump sum on disability, a lump sum on worker’s compensation. But in reality the pension is the ideal.”