Pension lessons from Down Under

November 8, 2013 7:11 pm

Pension lessons from Down Under

By Josephine Cumbo

Australia may pack less punch on cricket pitches and rugby fields these days, but when it comes to pensions, Aussies still reign supreme. Their national “superannuation” scheme, known locally as “super”, is the envy of the world. As many countries, including the UK, beginto tackle their pension savings crisis, Australia can quite comfortably boast that nearly 12m of its 23m citizens have a workplace pension pot, and are on course for a decent retirement.The engine of Australia’s pension system is a compulsory obligation on employers to pay into their employees’ pensions, or “super” pot. Currently, the employer contribution is 9.25 per cent, but it is set to rise to 12 per cent of earnings by 2021.

Compulsory superannuation payments have been in place since 1992, but Australia recently overhauled the super system to make it even stronger.

Jeremy Cooper was appointed by the Canberra government to undertake that exercise. Starting in 2009, he chaired a wide-ranging review of the country’s system which became known as the “Cooper Review”.

The recommendations made by his review put a much sharper focus on members’ interests, underpinned by a firm belief that “bigger is better” when it comes to pension schemes, both for governance and keeping costs in check.

FT Money met with Mr Cooper when he visited London recently to discuss what the UK could learn from Down Under.

One of the first topics Mr Cooper remarks upon is the Office of Fair Trading’s (OFT) recent report into workplace pensions, which identified about £40bn worth of savings at risk from high charges or because they are held in poorly governed small schemes.

“This is pretty alarming,” he remarks. ”Good governance is incredibly important. Most problems in the behaviour of fund managers and other intermediaries can be traced to weak governance.”

Mr Cooper, a lawyer by training and a former deputy chairman of the Australian Securities and Investments Commission, is also astonished by the revelation that there are 40,000 trust-based schemes, many of those with less than 1,000 members, in the UK – a figure he says is “too many”.

“The large number of very small defined contribution (DC) funds in the UK must mean that a very large number of these funds are not harvesting economies of scale for the benefit of their members,” he says.

“Pensions is not a cottage industry. Substantial experience (on the part of trustees) is needed to be across all the myriad challenges that arise in running a pension fund.”

“The impact that good governance can have over poor governance has been estimated to be in the range of a 1 or 2 percentage points difference in investment returns each year, perhaps more.”

He says there is “an enormous opportunity” for the UK to deal with its scale problems, as fleshed out in the OFT report.

“The solution is evident. It can be fixed by adopting the multi-employer super trust model, or something along those lines, with demonstrable benefits to members.”

As with the UK, pension charges are an issue which Australians have had to contend with. As part of Mr Cooper’s remit, he was asked to look for ways to drive down pension charges, which he concedes are “still too high”. However, he declined to recommend a cap on charges, as ministers are now proposing for the UK.

“Firstly, we felt: what was the right number?” he asks. “Secondly, we asked: what if the number is not ambitious enough? You would almost be inviting the industry to come in higher and that would not be a good place to be.”

Instead of a charge cap, Cooper says the Australians got “heavy-handed” with the industry in other ways, including the introduction this year of “MySuper”, a product which sets new legally-enforceable standards for governance, costs and investment approach.

Employers can only make “super” payments into default funds that are MySuper accredited. If the MySuper fund doesn’t meet these standards, its licence can be revoked. Among the duties hard-wired into MySuper is a requirement for trustees to consider scale efficiencies.

Australians are also protected against higher charges if they are no longer active members, known as deferred member charges in the UK, or “flipping” in Australia. “We said that’s crazy, so we canned that,” says Cooper.

Another key element of the Australian system is that members can choose where their super funds are paid, and are not forced to stick with the funds chosen by the employer. Mr Cooper believes “member choice” injects a competitive dynamic in the market, absent in the UK.

“While not many people exercise their choice, the fact that they have the right to do so puts players on edge,” he notes. “The industry behaves in a different way than if you had a completely captive market.”

Mr Cooper acknowledges the difficulties for governments in pushing through tough reforms, adding that “industries are typically not that good at transforming themselves, but you need to bring them with you”.

However, raising the bar was necessary to build confidence in the system, he notes, adding that it isn’t absurd to find Aussie blokes “standing around the barbecue these days comparing their self-managed super funds”, an unthinkable scenario in the UK.

“If you have a cutting edge system then you can confidently ask savers to contribute more to it,” he says of the UK’s challenge to raise savings levels.

“But if you have manifest governance issues, if you’ve got a scale problem, you’ve got leakages and agency conflict and those sorts of issues, it is a little bit harder to put your foot harder on the accelerator.”