Jeremy Hunt chose a fight he knew he would lose. The Chancellor was on stage at the Global Investment Summit in London last week with Dean Stewart, the head of one of Australia's largest pension funds, when he began boasting about Britain's sporting prowess.
Team GB won medals at the Tokyo Olympics. According to him, the Olympic Games were impressive, even surpassing the Australian ones.
“Shall we start with cricket?” joked Stewart, before she turned to the merits of her country's so-called «old age» pension schemes.
Hunt admitted it was «very, very painful… for any Brit to be forced to point out that Australians do better.» But it's no secret that he wants to emulate Australia's success in delivering better returns to pension savers.
The Chancellor is fascinated by the fact that most people Down Under have one pension fund that follows them as they change jobs. Underperforming funds are named and shamed, and even banned from bringing in new investors.
“We won’t get there overnight, but we think it’s worth learning,” says one Treasury insider.
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But creating an entire retirement ecosystem isn't as easy as copying and pasting. So what can Britain realistically learn and emulate from Australia?
Stewart, who heads Aware Super, which has A$150 billion (£80 billion) under management, says Australia's success comes down to three factors.
“Firstly, this is a must for all working Australians «, she says. Secondly, all the money is locked. “You won’t be able to touch it until you retire,” she adds.
Third, most people save in so-called defined contribution (DC) schemes, in which pension payments are based on investment returns rather than on the promise of a minimum post-retirement income that this offers. — so-called defined benefit (DB) schemes.
This mandate for employers in Australia means the amount they have to contribute has risen from 3% in 1992 to 12% by 2025.
Additional employee contributions are voluntary and enjoy tax benefits. In contrast, UK pension contributions require more from the saver, who contributes up to 5% of the 8% minimum.
Thirty years of growing contributions to consolidated and diversified schemes have created Australian superannuation funds that far punch above their weight on the world stage.
The Australian superannuation system has almost A$3.5 trillion (£1.9 trillion) in assets. By comparison, the UK's auto-enrolment system has only been around for a decade and has contributed around £545 billion to defined contribution schemes in the UK.
Although contributions are made automatically, the system relies heavily on apathy to force people to save, and people may still opt out.
The UK government's intention is to eventually raise contribution rate up to 12%, evenly distributed between bosses and their employees. But it is understood this will not be included in the upcoming consultation on lowering the automatic enrollment age from 22 to 18.
Baroness Altmann, a former pensions minister, says higher contributions are inevitable if people are to enjoy their retirement. “I think the current level of contributions is just the beginning,” she says.
“Unlike the past, when UK pensions were provided by employers bearing all the risks and costs, in DC pension funds, dependent on investments, you cannot expect large pensions from small contributions.”
The Institute for Fiscal Studies has highlighted that fewer than one in 100 private sector workers actively increase their pension contribution rate in response to a 10% pay rise.
Lady Altmann says linking pension contributions to pay rises is a good thing . “I’m a big fan of automatic escalation,” she says.
“There is nothing stopping pension providers asking their clients, after any pay rise, whether they would like to get free money from the government by investing some of their higher salary into their pension fund. For example, increasing wages by 1 percent of 3 percent each year will result in a significant increase in contributions over time. For each worker, their own money will be topped up with additional tax relief, which could raise contribution levels.”
The government's reluctance to publicly state its target for increasing auto-enrolment contributions demonstrates the difficulty of implementing such a policy. policy when inflation is high.
Conscious superboss Deanne Stewart says governments may be tempted to look to pensions as a source of funding to tackle economic problems. Photo: CHRIS RATCLIFFE/POOL/EPA-EFE/Shutterstock
While Aware Super's Stewart believes preventing savers from touching their pensions until retirement is also key to Australia's success, she admits there is a growing risk of banks becoming politicized due to their sheer size.
During last year's election campaign, former Australian Prime Minister Scott Morrison promised young people they would be allowed to take up to A$50,000 from their pension pots to get on the housing ladder if he was re-elected.
Critics, including many pension funds, said it would only lead to higher house prices. Stewart says pension funds should always be allowed to act in the interests of their members.
“There is always a temptation for governments to look at the pension system as a source of funding to solve other problems in the economy,” she says.
“Funds like us can absolutely play a role in nation-building projects, for example, but only when the risk-return profile of each investment adds up.”
Fragmentation too remains a big problem for the UK.
Gregg McClymont, the former shadow pensions minister, points out that Nest, the largest workplace pension scheme, is largely made up of millions of tiny pension pots from the poor, many of whom have been forgotten.
“Prior to automatic enrollment, most private sector workers were not offered a workplace pension. Now not-for-profit universal schemes offer pensions to everyone, while profit providers focus on the more profitable larger banks.»
The average active Nest member earned around £21,000 a year in March 2022, compared to the average average of around £28,000. Meanwhile, the average Nest pension fund in March last year was around £740 for women and £870 for men.
With 11 million members, these small numbers add up.
However, McClymont says: «The problem here is economics: there are a lot of very small banks that are not cheap to run.»
McClymont, who now works for IFM Investors, which invests in infrastructure on behalf of Australian superannuation funds propose that the UK follow their example and create a specialized structure representing large and small pension funds.
Australian superannuation funds invest about a quarter of their cash outside of stocks and bonds, compared with just 9% in the UK, where low-risk, low-yield bonds dominate.
“If you want to collectively create scale to drive down investment costs, the only way to do it quickly is to let pension funds collectively create their own engine,” he says. .
The UK has already tried this with the Pensions Infrastructure Platform (PIP), launched by former Chancellor George Osborne. For a time it appeared to be a resounding success, with PIP working to attract investment to fund London's multi-billion pound super sewer network.
However, an unclear mandate and cost structure that some members felt did not help failure to provide optimal value for money led to its final decline.
McClymont also says Australia's decision to link tax data to population and pensions was critical.
While the move sounds trivial, he says the creation of a so-called «Superstream» or digital water system, which would facilitate easy movement of pension funds.
Lady Altmann says the failure to make progress on the issue in the UK has put the country at a disadvantage. The Association of British Insurers (ABI) says the value of lost pension pots in the UK has risen by more than a third to £26.6 billion since 2018, with more than 2.8 million pension pots now considered 'lost'.
This simply doesn't happen in Australia, where pots can be easily reunited with their owners. In addition, they are now automatically «pinned» together under recent legislation.
Hunt may be hoping to create an army of retail investors to take charge of their pension funds. But McClymont says the evidence suggests it's a red herring.
«People just don't participate in any system,» he says, pointing to a report from the Australian Institute of Superannuation Trustees (AIST) , which represents an industry in Australia in which less than 5% of savers switch funds each year. «You need institutions that deliver good results without waiting for participation like in Australia,» he adds.
AIST highlighted that while superannuation funds are now required to tell people when they are underperforming, given that 44% of Australian adults have a reading level below the teenage level, transition rates are still low.
In the UK, the government advice website Gov.uk is aimed at nine-year-olds.
McClymont says Australia's success is partly down to institutions being concerned about being named and shamed, and to league tables that are regularly reviewed by industry representatives. This alone has led to consolidation, says Stewart.
«Australia has taken steps to weed out funds that have performed poorly over the long term, and while this is still a relatively new initiative it is still being refined «This has already led to underperforming funds merging with better performing ones. There were more than 1,500 super funds in Australia in 2004. There are now fewer than 150.»
Lady Altmann is calling on policymakers to start with simple things.
p>“Pensions are free money from your employer and other taxpayers, and an opportunity to invest in future growth companies, infrastructure or social housing,” she says.
“Positive messages about pensions are almost never heard The public only seems to hear “you're not saving enough” and “you're looking at a miserable retirement” instead of “well done, you've made a good start in preparing for the rest of your life.” Positive general messages like these can start a change in attitude towards the game.
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