Pensions – the Australian lesson

February 24, 2014 12:42 pm

Pensions – the Australian lesson

By Josephine Cumbo

Think back to the last time you changed jobs. You probably thought a lot about your new salary, responsibilities and hours of work. You might have taken into account how much travelling or commuting you would be doing, or whether the post came with attractive fringe benefits. What you might do with the pension savings you accumulated in your old employer’s fund was probably well down the list of priorities.

But for the government, mid-way through the biggest overhaul of the pension system in decades, the issue is a red-hot one. Without reform, there could be as many as 50m dormant defined-contribution savings pots by 2050 – employees switch jobs more frequently than they used to, and are more likely to be in a pension scheme courtesy of auto-enrolment.

The advice from Down Under – Australia has one of the best pension systems in the world, but is still getting to grips with 30m “stranded” pension pots that have accumulated in workplaces over the past two decades – is to get a system in place sooner rather than later.

On a recent visit to London, Nick Sherry, a former minister in the Australian government, told FT Money he “absolutely” regretted not tackling pension consolidation two decades ago.

“We should have dealt with it when the system first started,” says Mr Sherry, who was minister for superannuation in Julia Gillard’s Labour government in 2011, and a long-time champion of the “account follows member” concept.

That is also the blueprint for the UK proposals, known here as “pot follows member” . It’s proposed that workplace savings of £10,000 or less will automatically transfer with a member when they change jobs.

“We did not appreciate the problem that was going to arise,” says Mr Sherry. “We had a workforce of 11.5m-12m and because of the movement from one employer to another, at our peak we ended up with 30m accounts, of which about 8m-9m were declared lost accounts. We should have dealt with this from the start.”

Australians have the freedom to move their workplace “super” account to the fund of their choice without losing their employer’s contributions – unlike the UK, where employers only pay contributions into the funds they have chosen.

But Canberra policymakers took action in 2011, when workers showed little appetite to roll over over their funds, despite the cost and administration benefits.

“We needed to act,” says Mr Sherry. ”In a mandatory defined contribution system you need what I call autopilot solutions. So if an individual wants to turn off the autopilot that’s fine, but otherwise it’s left on autopilot.”

He says a range of automatic transfer options were considered but account follows member was considered best.

“I advocated account consolidation as I always thought it was important for the member to see one account statement, not different statements,” he notes.

The first phase of a series of consolidation reforms, which came into force in 2013, placed a new duty on superannuation funds to pool multiple accounts held by an individual within the fund, irrespective of the size of the account.

“It’s early days but the number of lost accounts has started to come down,” says Mr Sherry.

The next phase would have introduced measures to see automatic consolidation between funds, with a worker’s account following them to a new employer’s super fund, when they changed jobs unless they opted out. This is broadly the model for “pot follows member”, under consideration for the UK.

The Australian Tax Office would faciliate mergers of members’ inactive accounts with their active account when they move jobs. This was to commence with account balances of under A$1,000 in 2014, moving up to A$10,000 in 2016.

However, this leg of the reform has stalled amid a political row over the effect on insurance cover which is bolted on to to members’ super accounts.

On whether the Aussie model could transfer to the United Kingdom, Mr Sherry notes that the UK faces a number of challenges, notably the proliferatin of defined contribution schemes. Ten years ago, Australia had 3,500 superannuation schemes but that is now down to about 360. The UK has tens of thousands of DC schemes.

“You’ve got so many funds here, you’re still dealing with far greater number of accounts than we are in Australia,” says Mr Sherry. “These are your big challenges but at the end of the day they are challenges that have to be overcome.”

“Australia also has an advantage in having electronic activity between funds, which keeps the system running smoothly and efficiently, and a centralised reporting regime for lost accounts,” he adds.

He says that the “Berlin Wall” of restrictions placed on the UK’s National Employment Savings Trust (Nest), a state-sponsored occupational pension scheme aimed primarily at lower earners, would need to be dismantled in order for pot follows member to work fairly.

“I am pleased that the minister is tearing down the Berlin Wall,” he says.

However, pot follows member is not a done deal. The UK’s Labour party is arguing for an “aggregator” model, where small pots are automatically transferred into one or more aggregator schemes instead of being shifted into a new occupational scheme that may be inferior to the old one. Mr Sherry says this model could lead to fragmentation.

“Over time you could end up with a number of accounts with different aggregators, which is not great for the member,” he says. “One of the big advantages of pot follows member is having one account statement. In my view this is the best approach.”

Whichever way the government here ends up going, Mr Sherry says it is at least dealing with the issues now, and “not wasting 20 years like Australia did”.