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Mike Ambery is Standard Life’s director of retirement savings. He visited Australia earlier this year to learn how pensions work there.
Australia: that faraway country of Christmas barbecues, diverse (sometimes terrifying) wildlife, coral reefs and spectacular cityscapes.
The land Down Under occupies a unique place in the UK public imagination for its beaches and sunny climate, but in our industry it has become increasingly associated with something quite different: its pensions model.
Sometimes considered the panacea for all our pension woes, Australian pensions are familiar in some ways, but incredibly different in others to our own, just like the country itself.
So do Australian pensions deserve their reputation?
Last summer I traveled to Australia with three of my Standard Life colleagues to meet key figures in Australia’s defined contribution pension world, including chief executives and trustees.
The main objective of our visit was to establish strong relationships with our Australian counterparts, as well as learn more about the strengths and weaknesses of their pension model and the comparisons that can be made with the UK.
Our sessions covered the structure of Australia’s huge pension plans known as Supers and how private pensions intersect with state pensions, as well as how many people use advisors to make decisions about their retirement and the options available.
Australia is known for its Christmas barbecues, wildlife, coral reefs and spectacular cityscapes… but it’s the pensions model that interests the UK financial industry.
They are Supers super: How do private pensions work?
Australians tend to interact with them: Supers and their performance are often a topic of social conversation and are advertised in prominent locations such as billboards and stadiums.
It is clear that savings adequacy is a strength in Australia.
It has gradually raised minimum employer pension contributions to a higher level than the UK, and they will rise from 11.5 per cent this year to 12 per cent of salary from next July.
This compares to employers contributing a minimum of 3 per cent of your ‘qualifying income’ (meaning the portion of your salary between £6,240 and £50,270) in the UK under car registration.
In Australia, workers do not pay a personal contribution, while in the UK the minimum personal contribution is 5 per cent (including tax relief) of qualifying income.
This has allowed for greater adequacy of savings and a higher expected standard of living in retirement in Australia compared to the UK.
It is difficult to imagine a scenario in which minimum employer contributions would rise to as high as 12 per cent in the UK.
Instead, any future increases would likely be a combination of minimum employer and employee contributions.
This needs to happen to improve the adequacy of savings in the UK, and we hope it will be included in the government’s next review of pension adequacy.
However, future changes should be made gradually, when the time is right for both employers and employees.
Understandably, there is a strong focus on the Supers’ performance. They are subject to an annual performance test, which allows for regular comparisons between Supers on a number of metrics, including investment performance.
If the test is not met for two consecutive years, the funds will be penalized and effectively blocked from accepting more money and effectively exiting the market.
Performance testing has led to further consolidation, and while tariffs are generally higher in Australia than in the UK to manage the sustainability of the service, in the long term consolidation has led to greater economies of scale which should help to reduce them.
In the UK, the Financial Conduct Authority has suggested a similar direction through its Value for Money framework, which it consulted on earlier this year.
Retirement plans can harness the power of consolidation and economies of scale to drive investment in domestic and global private markets.
This has the potential to boost outcomes for savers, as well as support the economy through investment, and is similar to the structure proposed by Chancellor Rachel Reeves in her recent speech at Mansion House.
Investment in the private market has been both global and domestic: Supers’ investment in Heathrow Airport, of which one Super, the Australian Retirement Trust, owns 11 per cent, the King’s Cross area and offshore wind farms from the United Kingdom have benefited Australian savers.
Mike Ambery: It is difficult to imagine a scenario where minimum employer contributions rise to as high as 12 per cent in the UK.
Australia’s state pension is means-tested
One of the biggest differences is the fact that in Australia the state pension is means-tested and accessing it is much more complex than in the United Kingdom.
It provides a minimum standard of living for less wealthy pensioners and is considered more of a state benefit: unlike in the UK, there is no link to National Insurance contributions or similar in order to access them.
Needless to say, a similar measure in this case would prove immensely controversial. It is also difficult to make direct comparisons between the UK and Australian state sectors due to a number of fundamental differences.
For example, there is no inheritance tax and healthcare is also financed differently.
What can we do better in the future?
Australia shares the UK’s need for greater access to personalized advice and guidance before, during and after retirement.
In the UK, the FCA is trying to address this through its review of advice/guidance limits, and there appears to be some really positive work being generated, including the ability for providers to offer “targeted support”, which that would allow us to say “This option might work for people like you.”
There is much we can learn from Australia, particularly in regards to its strong focus on savings adequacy and the structure of Supers.
However, we should not try to copy and paste between two very different countries and societies.
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