Lessons from Down Under

Like the UK, Australia has been faced with a dual crisis in its state pension scheme. Benefits payments to an ageing population threatened to swallow up ever larger chunks of Australia’s budget, yet the Australian social security system was unable to provide an adequate income for pensioners.

Reform began in the mid-1980s with the introduction of a retirement system based primarily on mandatory private savings in superannuation funds, known to Australians as “super”.

Most people are entitled to compulsory super contributions from their employer. These super guarantee contributions must be at least 9 per cent of ordinary earnings up to a maximum contribution base.

According to Recep Peker, a senior analyst with Sydney-based researchers Investment Trends, almost a third (29 per cent) of employees boost their super by making contributions.

“When establishing the defined contributions super system in Australia, the government signalled to Australians the need to take responsibility for their own financial future,” says Mr Peker.

Australia now has one of the biggest pension fund industries in the world

“As a result we have a far more developed direct investment market with, for example, nearly three times the adoption of online share trading versus the UK.”

Australians are also keen for the employers’ contribution rate to be higher and 74 per cent were in favour of a recent government proposal to increase the compulsory rate to 12 per cent.

“Super funds are also a great way of getting the public insured – 46 per cent say they have life insurance with their super fund,” says Mr Peker.

The majority of Australia’s A$1.34 trillion (£908 billion) superannuation industry is split across four types of funds: Self-Managed Super Funds (31 per cent); retail funds (28 per cent); industry funds (19 per cent); and public-sector funds (15 per cent).

Professor David Blake, director of the Pensions Institute at London’s Cass Business School, commends Australia for pioneering auto-enrolment. “They started auto-enrolment in the early-1990s, before we even knew what auto-enrolment was,” he says.

“They had a deal with the unions whereby, instead of getting a pay rise, they accepted 3 per cent paid into pension plans, with 3 per cent the following year and a further 3 per cent thereafter.

“The good thing in Australia is that, as well as auto-enrolment, they have this auto-escalation of successive increases,” says Professor Blake. “The bad thing is that pension fund management charges are high. Also there is no requirement to annuitise – there’s no requirement to use a pension pot to buy an annuity.

“So what people are doing in Australia is called ‘double dipping’ – they are spending their pension pot and then falling back on social security.

“The UK sells more than half the world’s life annuities, worth about £13 billion a year, at a rate of 10,000 a week. In contrast, last year in Australia, just 29 annuities were sold voluntarily.”

The mandatory requirement to annuitise pension pots was scrapped in the UK last year and, although so-called capital and flexible draw-down – the amount that can be drawn from a pension pot – is regulated around a £20,000 retirement capital threshold, we may draw a further lesson from Down Under.