Australian superannuation trustees can draw important lessons from around the globe. Unlike many other aspects of the global economy, the pensions and superannuation sectors of many countries have proven remarkably resistant to international standardisation.
The retirement income systems of most countries remain firmly in the domain of domestic politics. Indeed, a glance at the pensions systems across the European Union provides a tapestry as rich and diverse as the cultural and linguistic differences within the Union.
However, one thing that does remain constant in many global pension forums is the perception that the Australian superannuation system is a progressive example from which other jurisdictions can learn.
The Australian superannuation system is highly regarded internationally, perhaps even viewed through rose-coloured glasses, with many professionals paying much closer attention to developments in Australia than most would realise.
From the broad coverage, early transition from defined benefit (DB) to defined contribution (DC), and extension of insured benefits for disability-related early retirement, member investment choice, to benefit portability; there are many positive lessons which can be learned from the Australian system abroad, and the somewhat related British pensions system.
Looking over the fence for inspiration
From our own rose-tint free view of the Australian superannuation system, while built on good foundations with robust structures, many would agree there is still plenty of room for improvement.
In speaking to superannuation and pensions experts while in Europe recently, I came across some themes and developments which Australian superannuation trustees, service providers, and regulators would do well to keep an eye on.
Defaults without compulsion
A sacred cow of the superannuation system is the mandatory nature of the Superannuation Guarantee (SG) at a minimum level.
The United Kingdom rolled out auto-enrolment reforms between 2012 and 2017 which have extended coverage of default employer and employee contributions to most of the workforce. Contributions have risen from 3 per cent to 8 per cent of salary, with opt out rates remaining relatively low.
While I’m not suggesting that the mandatory nature of the Australian system should be changed, the mandatory nature of the SG level has shifted the attention of Australian superannuation funds to policy debates about the appropriate ‘minimum’ level of SG rather than focusing on assisting members in setting an appropriate level of contributions based on their living expenses, projected future income, and goals for retirement.
Many Australians assume that government calculated minimum level of savings must be enough. Giving individuals the ability to opt out can promote greater interest and involvement, which can also result in personally aligned decisions around the right level of contributions from savings for retirement.
The UK Government initiated a project in 2016 to develop a Pensions Dashboard, which will provide an online centralised view of all pension benefits and entitlements that an individual has.
The initiative seems simple, and of greater importance in a system where there is no portability of benefits and significant DB entitlements held by many workers. However, on closer inspection the concept has aspects which could prove beneficial to the Australian superannuation system.
The UK Pensions Dashboard will include detail of any government pension entitlements that an individual has, in addition to any occupational pensions.
Obtaining access to information about government benefits and entitlements in a standard and secure format has been an ongoing challenge for superannuation trustees and financial planners in providing technology-enabled personal financial advice.
As the means tested Age Pension will continue to be one of the most important aspect of retirement planning for most Australians, lessons could be drawn from the UK Pensions Dashboard in making government entitlement information available.
Coupled with the Consumer Data Right, a centralised view of all an individual’s superannuation, government entitlements, and private savings via Application Programming Interfaces (APIs) would provide the information framework for innovative technology-driven self-help tools from superannuation funds to efficiently assist large numbers of members as they approach retirement.
Collective defined contribution
The United Kingdom is heading towards a system which allows trustees to shift to a collective defined contribution (CDC) scheme for members rather than a defined benefit regime.
Sometimes referred to as a target return scheme, a CDC provides contributing employers with the contribution certainty of a DC scheme, while using the pooling of member savings to manage sequencing risks to members.
With the Royal Mail Pension scheme moving towards offering a CDC as an alternative to its DB scheme, views on CDC tend to vary significantly depending on whether it is viewed from the perspective of a DB or DC perspective.
Compared to a DB scheme, a CDC does expose members to investment risks where there is prolonged failure to meet target returns.
Compared to a DC scheme, the CDC does provide members with greater certainty and some protection against sequencing risk, however the smoothing of returns at a member level introduces the risk of arbitrage in an environment of portability between funds.
While the reception to CDCs in Australia has been cool, superannuation funds might benefit from considering ways in which pooling can be employed in product design to better protect members from market timing and sequencing risks.
A broader perspective to benefit members
The velocity and breadth of change in the superannuation industry has been a challenge to many superannuation funds and industry professionals. In such circumstances it’s easy to become narrow and focused in our perspectives and thinking.
Finding the time to learn from these, and other developments abroad can help the Australian superannuation system remain prominent as a global leader, while continuously improving the outcomes for members.