By Frank Carr, CMO, Financial Risk Solutions
In a review of the pensions markets in which Financial Risk Solutions (FRS) is most active, Australia, the United Kingdom and Ireland, we found three key challenges pensions providers face from this rapid growth - oversight, inclusion and performance.
Future growth of DC in Australia, the UK and Ireland
Superannuation assets in Australia represent EUR 1.667 trillion, which equates to nearly 78 percent of all managed funds in the country. The flow of funds into superannuation is increasing annually. Australian Super, the county's largest superannuation fund, manages monthly inflows exceeding EUR 1 billion. Currently, 9.5 percent of salaries contribute to private pension pots, and this figure is set to increase to 12 percent by June 2026.
Closer to home, 84 percent of employees in the United Kingdom are in a workplace pension scheme, up from 77 percent last year. The growth of enrolment is impressive with the total number of employees automatically enrolled by March 2018 at 9.5M, up from 5.2M in 2015. The total amount saved by eligible savers in 2017 was GBP 90.3 BN up from 86 BN the previous year.
While Ireland does not have auto-enrolled DC today, the government intends to develop and introduce an 'Automatic Enrolment' (AE) supplementary retirement savings system by 2022. AE will be an earnings-related workplace savings system where enrolled employees will retain the freedom to opt-out if they so choose. By 2027 the total contribution would be 14 percent of eligible earnings, comprised of six percent each from employer and employee and two percent from the state.
Three key challenges for global pensions providers:
1. Increased regulatory oversight
Regulators are driving much of the change in the industry and never has oversight been more crucial. Australia's Royal Commission into banking and finance exposed some issues in super annulation provision including selling people products they didn't need, payment of trail commission and other incentives that distorted behaviours. The fallout, which included forced resignations and job losses and may yet result in criminal prosecutions, has sent a clear message that the industry needs to step up in terms of transparency and risk mitigation.
2. Supporting a changing workforce
Changes in the way we work, such as the fast-growing gig economy, short-term freelancers and contractors will impact auto-enrolment. As will extending schemes to include low-income earners, ensuring all employees can contribute to their retirement savings. Additionally innovation in the manufacture of products for different parts of the market. Beyond the initial challenge of capturing these groups, pensions providers must find ways to manage these new investment operations in a low cost, low risk way. Streamlining back-office operations will be a priority.
3. Underperforming funds
As we have seen from Australia this year, underperforming funds will face increasing scrutiny from regulators. The Australian Securities and Investments Commission (ASIC) has warned that poor-performing super funds will be taken to court if they are failing to act efficiently, honestly and fairly. The regulator indicated that it would force around one hundred persistently underperforming funds out of the system. Additionally, the Australian Prudential Regulation Authority (APRA) announced that industry funds might be failing the sole purpose test as they diversify into additional products (mortgages and banking). The increase in annual flows of new monies into funds creates a challenge to find a home for such vast sums of new monies seeking solid returns.
With increasingly large annual inflows to the industry, robust controls must be in place to administer the tremendous amount of activity in numerous funds efficiently while mitigating investment operations risk. Technology partners will play a more significant role in ensuring pensions providers build and maintain trust with their members through the rapid growth of DC pension schemes.
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