I have recently returned from two fact finding trips, to Australia and the US, meeting plan providers, fund managers, employers, other consultants, plan members and Nobel prize-winning economists. During each trip it quickly became apparent that the grass is not always greener overseas.
In all DC markets, policy makers are contending with three distinct problems: how to improve coverage, help people accumulate savings and then decumulate in the right way.
Australia has cracked the coverage problem for the employed by making enrolment mandatory. The UK is almost there with auto-enrolment. Servicing the self-employed and the low paid is something the UK, the US and Australia still need to address.
In the US, enrolment is not compulsory and coverage is only at around 50 per cent. This is something they want to improve and it’s clear they are very interested in UK developments. The master trust model is certainly catching their eye – Nest was the thing I was most frequently asked about. Offering the opportunity to enroll employees into State-run multi-employer plans (MEPs) – similarly structured to UK master trusts – is something some State Governors have implemented and many more are considering.
Australia puts the onus on employers and currently mandates them to pay contributions of at least 9.5 per cent, increasing to 12 per cent from 2025. Generous, but perhaps not as generous as it first seems as the contributions also cover the cost of life assurance.
The US tackles the problem from a different angle. There is no compulsory minimum contribution, but a large proportion of employers who offer plan membership do so via a ‘save more tomorrow’ auto-escalation model.
When it comes to investment strategies, Australia holds its head up high.
Performance has been good and investment in infrastructure is often cited as the reason. Infrastructure is being considered more and more in the UK, but often the argument against it is illiquidity. Scale is clearly a key characteristic of a successful pension system and is a clear requirement for illiquid investments. However, with over $20tn of assets in the US DC market and scale already being achieved, use of illiquid investment there is surprisingly absent. This is not because of any lack of appetite for doing so – rather it is the fear of litigation that is stifling investment innovation in the US.
This fear is palpable. Class action against plans and plan sponsors, on the basis that high fees have eroded pension savings, is common. Fund managers are under constant pressure to keep fees low, arguably too low to enable anything but relatively vanilla types of investment strategies.
In all three countries, I would argue that there is not a DC pension system, just a long-term saving system. We help people build ‘pots’, but we’ve lost the notion of helping people build ‘pots to pay’.
That said, the US is ahead here, with most of the major fund managers offering investment solutions to help people manage income in retirement. As soon as proposed pension legislation in the Secure Act is passed, they expect default funds incorporating deferred annuities or annuity-backed securities during the decumulation phase to become widespread. In the UK and Australia however, you can hear only tumbleweed.
UK providers are keen to explain how they can support people up to retirement, but generally when asked how they help people after retirement, often the answer is “we don’t”. How is this right when people making withdrawals are still members of the pension plan?
The position is similar in Australia. I saw no innovation in the at-retirement space. The reason I was sometimes given was ‘because there’s no reward for innovation’ – which is effectively saying ‘why should we support people in taking money away from us?’.
In Australia, people are fearful of exhausting their pots while providers are focusing on retaining members’ assets for as long as possible.
In the global DC pension industry we need to stop our fixation on accumulation and do more to help people to and through retirement. I remember a time when pension meant ‘deferred earnings’, not simply ‘long-term savings’. We need to go back to that notion if we are to truly help people in retirement.
Neither Australia nor the US have solved all DC’s problems. Our UK market is still young and has the opportunity to adapt by learning from the experiences overseas. I just hope that we do.