By Dale Critchley, Workplace Policy Manager, Aviva
Australian adequacy approach
When it comes to adequacy, Australian auto enrolment kicked off with a 3% employer contribution. This increased, rather sporadically, to 11% today and further annual increases will take contributions to 12.5% over the next three years. While the UK looks set to abolish the lower earnings threshold, which would match the Australian approach, we have yet to see plans to mirror contribution levels.
The clear learning for the UK is that early decision making, and gradual change, provides time for employers to manage higher contribution rates. The Australian Government has shown it is easier to delay a plan, if circumstances dictate, than to delay making a plan until we have the optimum economic environment.
The UK Government’s focus on scale is rooted in the Australian example too. Australia is home to the ‘Super’ – mammoth multi-employer pension schemes. The very largest schemes exceed £100 billion in assets, allowing them to invest their default funds in an array of assets and take ownership of infrastructure across the world. The UK Mansion House Pension Compact, signed by firms like Aviva, who have similar scale to the largest Super, seeks to mirror this capability in search of higher returns for savers.
Value for money
Value for money is aided by a slew of data. Individuals can compare Supers online, based on charges and historical fund performance, as well as other product features. The real power comes from the ability of the Australian Regulator (APRA) to effectively shut down any underperforming scheme, a role proposed for The Pensions Regulator (TPR) in the UK.
It’s one of many interventions that have been implemented to help the Australian market work better and to encourage better decisions by default. Although Australians have had the ability to choose their own provider the issues created by low levels of engagement in the UK are mirrored in Australia.
More adequate contribution levels and better investment performance are being taken care of by increases in default contribution levels and regulatory oversight of default fund performance. A lack of at-retirement choices in the market has been addressed by the Retirement Income Covenant which requires schemes to offer decumulation options.
Small pots are not just a UK issue
Australia has a multiple pot problem too, caused by a lack of consolidation activity when employees moved to a new employer. It creates a real problem for Australian pensions savers because - unlike the UK where flat charges are rare - the prevailing charging structure means that multiple pots result in multiple fixed charges, and those with smaller pots pay much higher charges than in the UK.
While the UK is considering a multiple consolidator model, the Australian answer was a process known as stapling or pot for life. Contributions from every future employment are paid into the scheme an employee was a member of at November 2021, unless individuals choose another scheme.
It’s something the UK government have mentioned as a potential future change to the UK system, but unlike value for money and default contribution changes, this would require significant change.
From a systems perspective, the Australian Tax Office (ATO) keeps a record of everyone’s Super and any transfers are made through them. 158,000 people which is 3.6% of savers switched Supers in 2021/22(1). The system allows employers to pay contributions to multiple schemes through the ATO, or a commercial clearing house. Similar systems would be required in the UK.
A major risk is that stapling could see a reduction in the engagement and influence of employers and their advisers, especially if inertia means that new hires stick with their previous scheme as is happening in Australia. Larger UK employers and their advisers currently conduct regular and rigorous reviews of their pension provision, setting a benchmark for others. It’s resulted in average charges well below the regulatory cap and allows lower paid employees to benefit from the power of collective bargaining.
While some Australian developments set a great example, we need to be sure that any similar changes will deliver a better outcome for UK savers before we follow suit.
(1) https://treasury.gov.au/sites/default/files/2023-04/c2022-313936-yfys-review.pdf
|
