Australia may be best known for golden beaches, the Sydney Harbour Bridge and the occasional crocodile frightening tourists in the Outback.
But there’s another homegrown product from Down Under grabbing the world’s attention – the Aussie pension.
It is no secret in UK financial services circles that the British government has taken a keen interest in Australia’s $3 trillion superannuation sector, seen as a model for the UK’s own defined contribution pension structure.
Of particular interest to British ministers is how Australia’s mega super funds are investing their cash.
Unlike British DC funds, Australia’s biggest super funds are chunky investors in private markets, or unlisted assets, such as infrastructure, private equity and commercial property.
The country’s biggest super funds will typically hold around a fifth of their portfolio in these assets. This approach has enabled Aussie retirement savers to better weather severe stock market storms, with the country’s biggest super fund only delivering negative returns four times in the past two decades.
In contrast, British retirement savers – who will typically only have around 5 per cent or less exposure to private markets – have been subjected to the wild return rides of the stock market.
But there are good reasons why savers should be wary of what the Aussie pension experience will deliver in the UK environment, as it stands. Firstly, the government here has coupled the investment diversity push with its political agenda to finance economic growth through unlocking pension capital.
The Aussie super funds are also being subjected to similar political pressure from their government keen for the super sector to help solve the nation’s housing crisis.
A key difference between the UK and Australia, is the enhanced legal duty on super fund trustees to invest in the “best financial” interests of members.
British pension trustees are required to act in their members’ best interest, but do not have a hard-coded duty to focus on their best “financial” interests.
The enhanced trustee duty Down Under is helping super fund trustees push back against political pressure to put the country before the member. This is one area where the UK should follow suit.
Secondly, concerns have recently surfaced Down Under about how super funds are valuing their unlisted assets – a development which should be raising red flags.
Unlike public market assets, like listed stocks and bonds, there is no daily pricing on a directly held asset, like a toll road or airport, as many of the Aussie funds hold.
Instead, pension members must rely on the robustness of the legal and governance framework around unlisted asset valuations, to ensure their retirement pot isn’t unfairly impacted by ‘stale’ pricing, or even gaming by other members transferring out ahead of an anticipated asset write down.
Concerns in this area were brought to the fore early in the Covid pandemic when super funds were accused of being too slow to adjust their valuations of unlisted assets amid heightened market volatility.
The Australian regulator has subsequently found defects in how some funds were revaluing unlisted assets, and the ability of trustees to challenge the appropriateness of valuations by third parties. These are
serious matters.
Back in the UK, concerns are also being voiced in this area. The EDHEC, a Singapore-based research group, believes pension rights are being put at risk from poor and unreliable data on private market assets, particularly in the area of infrastructure. It wants the UK Pensions Regulator to set up best practice rules for private market investment.
The FCA is alive to risks with private markets, and has signalled its intention to launch a sweeping review of valuation practices by fund managers.
But these recent developments have seemingly not led to any pause in plans by at least nine of the UK’s biggest pension companies to plough at least 5 per cent of their assets in private equity, as agreed with the City of London Mayor under the so-called Mansion House compact.
Private market assets – while having the potential to deliver better returns for savers – are more risky, complex and costly for members, who will pay more to invest but with no guarantee of superior returns.
The lack of transparency around private markets means there is more opportunity for members’ hard-earned savings to leak into the pockets of managers through charges.
Given the risks to pension savings, the regulator should insist funds have robust governance processes in place – including skilled trustees – before they invest in private assets.
While the beaches might be better in Australia, one thing that retirement savers around the world need protecting from is investing in murky waters.