Podcast | What the Australian pensions system tells us about future reform in the UK

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What has driven consolidation in Australian superannuation, retirement income policy shifts and infrastructure developments? To find out, we spoke to The Hon. Nick Sherry, an ex-Australian Pensions Minister for Superannuation and Senator for Tasmania.

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Transcript

Sangita Chawla: Welcome to our Thinking Forward, thought leadership podcast series. In this series, we discuss trends and developments impacting the UK pensions industry, in order to understand how more people in the UK can achieve financial security today and in later life. I'm Sangita Chawla, Chief Marketing Officer at Standard Life. Today we're going to learn about the Australia pensions market, the fifth-largest pension market in the world. To do this, I'm very excited to have as our guest speaker, the Honourable Nick Sherry, former Australian Minister for Superannuation and Senator for Tasmania. Hi to Nick.

Nick Sherry: Hi Sangita, great to chat with you and talk about superannuation as we call it or pensions in Australia. I'm a little bit croaky, I've just got out of a week of COVID and I suspect I caught it over there in London or Europe on my travels a fortnight ago, but I'm out of it now. Back in action and keen to discuss our developments and what's been happening in our superannuation pension system in Australia.

Sangita: It was great to see you, Nick, when you were over here a couple of weeks back. I hope it wasn't me that gave you COVID!

Nick: No. I'm sure it was caught elsewhere in the airports or the aeroplane.

Sangita: You're recovering well now?

Nick: Yes. Feeling good and getting back into things here in Australia.

Sangita: Excellent. Well, thank you for joining us today and taking up your evening time. You were here a couple of weeks ago and we had a great day with you when we got around the table to learn a bit about the Australian pension system. Australia being the fifth largest pension market in the world, there's an awful lot that we in the UK can learn from Australia.

I thought it'd be just nice if we ran through a few of ideas and you could share your thinking with us. It would also be really interesting to hear some of the conversations that you had when you were over here in the UK. I know that you met with the pensions minister, so we'll probably get onto some of the topics that you may have covered with him. Can we make a start on probably comparing the UK pension system with the Australian one, and specifically let's think around auto-enrollment?

In the UK, we're coming up to the 10-year anniversary of auto-enrollment this October. Auto-enrollment has been hailed as one of the biggest successes in the UK pensions market. I've been working in this market for almost 30 years. And certainly, since my time of working, it's probably shown the biggest advances in terms of helping people stabilize or get to a point of actually starting to contribute towards their future financial outcomes. We've been doing it pretty successfully, we all believe.

We're all giving ourselves a pat on the shoulder here in the UK and saying, isn't that a good thing that we've done? In Australia, you've obviously been doing auto-enrollment for a lot longer and probably in a different way. It probably means something slightly different over there to the UK. Could you compare and contrast and say, has that been successful in Australia? Are there any particular aspects that have led to its success and how do you think the UK can learn from you over there?

Nick: Well, I think it's important to understand there are some differences economically, socially, and politically between Australia and the UK. In fact, when I was in the UK, it was the 30th anniversary of the superannuation guarantee, we call it. Which is now our 10.5% mandatory or compulsory contributions. I know in the UK you have auto-enrollment, so it's not compulsory, but you can opt out. You can't opt out in Australia. I think that is both systems in terms of participation, I understand in the UK, it's 90% plus in Australia, it's obviously compulsory. I think that's really important. Congratulations on your 10 years and we've done well in Australia.

There are some useful lessons to learn about some mistakes we've made along the way, but I think the now 10.5% contributions plus there's an average 4% voluntary contribution and it's a $3.5 trillion system, so it's very large now. It's large in terms of our economy, 160%. Most of the asset growth is obviously being invested offshore. I think importantly, the average outcome now for a person retiring currently in their early mid-60s is about $240,000. That will make a meaningful difference. We're 35 years old, you include the 5 years of the very early start of the system and so we're a more mature system. We are larger obviously and we've got some interesting experiences in that regard. Again, we are further down the track if you like in the development and it's defined contribution.

Most of our defined benefit including in the public sector were closed 10 or 15 years ago. They've long gone in the private sector, so we've got a very strong defined contribution base now which makes a meaningful difference for people's retirement. I think one interesting aspect of our system is the investment piece but before I get to that, I think it's important to understand one of the challenges in our system is it is very complicated.

We've got a lot of options. Individuals can select a fund, most default, which is important and then within a fund individuals can select different investment options. Again, most default. There is a complexity about the system that I think is challenging and it is important in that context that individuals when they do depart the default aspects of the system, that they do receive independent and robust advice in the interests of the member.

That's been a contentious issue because unfortunately some of our advisors haven't been as independent or giving advice in the best interests of the member and that's been the subject of justifiable criticism. That advice piece, if you like, is going through the last stages of reform to ensure it's more independent and robust. That's an important lesson I think, to learn. We've had a default solution on multiple accounts that's been a significant improvement to the system, but it took us 20 years to establish that reform.

I think, two other aspects, the investment issue is interesting, as I said, it's a very large system and we're investing more and more offshore. The system is primarily diversified equities. Most funds have between 55% and 60% equities and much smaller proportion of bonds and cash 20%, 25% but also, interestingly, we've seen the rise of infrastructure and property investment. It depends on the fund, but infrastructure and property is typically 15%, in some funds as high as 20%.

Certainly, the evolution on the investment side to more direct investment in infrastructure property, and also the shift of investing overseas because the system is very large. That's an interesting development. The Australian funds directly invest into UK infrastructure. Some of them partner with US and Canadian funds. I think that's frankly, in contrast to a lower level of activity from your auto-enrolment system into those types of assets. Again, that's important in the context of the leveling-up debates you've been having.

Sangita: Absolutely. Just on that point actually and it's fascinating. We've probably got many of our funds that hold nothing or not even 1%. I think the most you'd ever get is up to 10% and I think they're very few and far between in terms of investment in those illiquid assets like infrastructure, do you think one of the reasons that that's been so successful in Australia has been because of the fact that actually, it's only a small number of providers that are actually utilized to actually offer superannuation funds. The average size in the first place is considerably bigger. Whereas in the UK, we don't really have that level of maturity either.

Nick: Yes, look, there's no doubt that one of the benefits of fund consolidation or mergers and we've seen a very significant reduction over the last well 20 years and it's continuing mergers. Scale is useful it's not everything, but it is useful because it gives you infrastructure. For example, is complex. It's higher cost, but the returns after those higher costs and fees but you need the expertise. By and large, larger funds have been able to develop the capability to carry out the complex assessments required for infrastructure.

On that consolidation piece, our corporate funds, for example, which would be very similar to what you've got in the UK, the old company funds, the number is reduced from almost two and a half thousand, 20 years ago to 13 today. They've been folding up into the other funds, the multi-employer public sector funds and the retail insurance funds. Even the multi-employer the public sector and the insurance funds, their numbers have half from 300 odd down to about 150 in the last 20 years.

There's no doubt that that's been a major factor. There've been other influences as well. We've had significant privatizations, 10, 15, 20 years ago that provided the impetus and experience. Then the investment in infrastructure has moved from Brownfield assets into Greenfield assets even into now obviously ports, airports, tollways, electricity telecommunications, but we're seeing significant investment in new energy, wind, solar, new forms of infrastructure, even into areas like hospitals and schools the government runs, but the pension fund zone, I think that's been a very significant shift.

I think again, in the UK, perhaps with more experience consolidation expertise, you'll see greater levels of activity. Infrastructure's very interesting because it gives you an equities like return without the volatility. It is a very important component and I'd hope to see more of that occurring in the UK.

Sangita: Yes, I think it's one of the things that we missed the opportunity when auto-enrollment came in initially 10 years ago to really push harder with consolidation. Obviously, there's been a number of initiatives in this country with master trust and authorization frameworks to try and get more consolidation but I would say, I think it's been pretty slow. Do you think that-- has it been anything in the Australian model that's driven that acceleration to consolidate and was it some regulatory overhead or governance burden that's been placed on the pension funds?

Nick: That's a really good question. Look, I think frankly employers and their corporate funds, there's been a steady increase in regulation and accountability on trustees who are the responsible for the governance, licensing, individual licensing of trustees, training requirements, reporting requirements, accountability on your default investment, performance. There's a very, very significant level of regulatory oversight and that's certainly led to a significant amount of pressure to merge or consolidate.

I think the second issue is the evidence and there is always exceptions, but the evidence shows you do need to be in the tens of billions if you like in order to make the best use of scale on investment. The fund I've just become chair of we're six and a half billion, we are discussing a merger. We'd like to be a minimum of 20 billion in the new partnership that we will probably enter into when we merge. They're the driving forces.

Sangita: Yes. Excellent. I think ESG is part of that. Thinking with investments is something that's pretty topical in our frame of reference here in the UK. You may have seen on the TV, we had temperatures reach up to 40 degrees here in London, and around the country this week.

It's been pretty uncomfortable for many of us, and obviously where that comes a whole penalty that we face in this country of trains not being able to cope, houses not being able to cope, fires been spreading, et cetera, but there's been an awful lot of chat again about, are we doing enough to combat climate change? It's obviously something that the trustees and governance boards are taking pretty seriously. How far advanced is the Australia superannuation framework in thinking about ESG?

Nick: It's a very, very important part and growing in importance. When I was first a trustee 30 years ago no one even discussed or thought about ESG, but again, there's a regulatory requirement on reporting. It is standard practice to assess any investment in terms of its sustainability and obviously, Australia is a major producer of coal and gas, for example, and funds invest, but funds have got to keep a close eye on the developments and the impact of the environmental considerations, carbon, and issues associated with carbon pricing, but also too, obviously, the environmental issue, but the social and the governance.

We've had some interesting cases. The Rio case, it's well known. Where Rio, the mining company, destroyed some Aboriginal cave sites. Again, the funds and the community put significant pressure and accountability on Rio governance. All our funds now vote their shares. They're expected not to just delegate to the asset manager. They're expected to make decisions. We've seen that impact on some of the executive bonuses.

ESG across the board is a very major feature of the Australian system, and it hasn't been imposed by government, it's because of the shift in the community's views and attitudes and trustees reflect that. It's not just the super funds, it's also been the finance sector more broadly. In contrast to the UK, we've had a government that's been perhaps best described as been very luke warm about the developments on ESG. The funds and the finance sector and the regulator have led the way in what is just going to be an ongoing and growing area of oversight and investments by our funds.

Sangita: Fascinating the trends that we're facing around the world, and the ESG being driven by the person almost, isn't it? Rather than regulation. I want to just go back to something that you said earlier and just explore it on guidance and advice. That's something that this country is becoming very, very aware of. That we've got an increasing number of people that are approaching retirement, and actually approaching retirement, having to make decisions about financial futures, more of them having to rely on their own savings or their DC pensions.

They're getting to that point, and we're asking them to make very significant decisions about what to do with asset sizes, which potentially could be worth more than other savings they have. A lot of the work we've seen and the research we've done, we see that only 20% at best of people approaching that age group, 50 to 64-year-olds will be taking some form of advice.

There's a massive guidance gap. Something that we're all very focused on. It's something we've spoken to the pensions minister about as well. We know that it's atopical of a mine for him. What are you doing in Australia? Did you say that there was a need to take advice or any form of imposed restriction or requirements for the individual, or are you seeing that over there?

Nick: Oh, absolutely. The purpose of the system is to provide an income in retirement. Again, one of my concerns and I think it's important for the UK to note, is that Australia has been focused on pre-retirement and asset accumulation and growth, and should have focused on the de-accumulation or the pension stage a lot earlier. We've got a new requirement now in respect to what's called a Retirement Income Covenant, but before I come to that. In your 50s and 60s, cognitive decision-making starts to decline. We are dealing in Australia with a defined contribution system, and auto-enrollment is defined contribution.

You've got default solutions, but at retirement, fundamentally, we are asking individuals to make very significant decisions that I want an annuity or a lifetime pension. In Australia's case, we have a means-tested state pension, unlike the UK. You've got decisions to make about in-home care, ultimately about age care. The advice piece is critical, entering into and in retirement. I'm not suggesting you need this advice every year, but there are critical phases. "Where do I place my money? What sort of annuity pension draw-down product?"

These are complex decisions. At the best of times, they are complex decisions, and therefore the need for, again, I'd stress independent rigorous advice that is in the best interest of the member. Everyone's different obviously. One of the big challenges, of course, is, "What's your longevity going to be?" The average life expectancy in Australia for a male is 83, 84. For a woman, it's about 86, 87. They're going to be 20, 25 years in retirement, having to make and adjust their decisions about their income. There's an interesting related issue to your home asset.

Some people may want to draw some of the asset to help them in retirement as well. Advice is absolutely critical and delivering it in a fair, and at a reasonable cost is going to be a very important part of the retirement income covenant that we've now had from July 1, which for the first time is requiring funds to set out the retirement strategy, how it's going to be implemented.

Now, not a lot has happened that's new so far, but ongoing, I think, the advice but also the use of technology, for identifying individual characteristics via app and website applications, to gather information and data on which judgments can be made, that again, is going to be a huge part of the future. As I say, I think one of the lessons to learn from Australia is do it sooner rather than later, we waited 30 years and I hope that the UK is focusing in this area as well, rather than leaving it for long as we did in Australia.

Sangita: Do you have the challenges of cost over there? One of the barriers to financial advice, there are many. Lots of people don't know who to trust, et cetera, but cost is definitely one of the reasons that people feel obviously, that they can't go and get financial advice. There's a very specified definition in the UK but what constitutes advice, and what can be defined as being guidance.

Nick: Yes.

Sangita: Also, how do you cost for guidance as well? Are those are some of the things that you're thinking about in your new role as a chair as well?

Nick: Yes, it's a significant issue, because we have what's called general advice, where you can provide a general view about what an individual should do and they can maybe make a decision on the basis, but individual or personal advice, where you look at the individual characteristic of-- You may want to look at their budget in retirement or what they will be spending sort of in that first, say, 10 years of more active retirement and then where do they get the income? What sort of income stream do they need? Should it be an annuity for, say, 10 years? And look, this does come at a cost. I think it is a significant challenge to deliver personal advice, particularly, in a cost effective manner.

We've heard a lot about Robo advice. I have to say, there's been a lot of talk about it globally, but I haven't seen too much of it being delivered. I hope more can be done in that area, because it is more cost-effective. Also, it's human nature, particularly in retirement, I think, individuals want a level of human interaction and that does come at a cost. The cost factors, the regulatory factors, and as I say, we've had a number of attempts at this, because we've had some scandals and miss-selling. We've had a number of attempts, they're going through yet another review of what you can do as an advisor. Hopefully, that'll be settled but it has to be a important component in the lead up to an in-retirement, because pre-retirement, as I say, is largely default. You've got effective default solutions, but retirement needs more active consideration.

Sangita: You were here a couple of weeks ago, and you were with the pensions minister for a meeting with him and what we hear and I've heard myself actually from him is that he's very much looking at Australia as a model country to really consider hard as something we should take lessons from for the UK. Did you get anything specific from the minister, things that he thought, "Well, actually, this is definitely a couple of things we should be looking at"?

Nick: Firstly, I should say I was very impressed. I think he's been the minister now for five years. I think he's still the minister, notwithstanding the current upheavals that you've been going through. I was impressed because he has an obvious interest in key features in the UK and obviously, I won't go to my personal discussions, but the areas of interest were around trying to sort out the problem of multiple parts, fund consolidation, larger funds, mergers to deliver a greater investment capacity, particularly in areas like infrastructure. Also the minister's very interested in the retirement income package, and what experiences Australia has gone through in those areas that the UK can learn from. As I say, I was very impressed by his interest and his focus on those critical components of auto-enrollment as it develops.

Sangita: Well, he is in his role still, so we are pleased that he's driving this forward and continuing to drive it forward. 

Nick: Oh, look, I'm an interested observer. I've left political life a long, long ago but as I say, I just note that Guy Opperman is a particularly interested Pension minister with enthusiasm and some key issues he wants to try and deal with in auto-enrollment. I think that's really important and whoever becomes Prime Minister, I hope that Guy Opperman remains the minister from the perspective of someone who has an obvious interest and focus on improving the auto-enrolment system.

Sangita: I think it's one of the shames of many countries that we lose out on a lack of continuity in pension, governance, and framework and policy development by changing people who drive it forward, so anything we can do to stabilize that I think is an excellent thing. I'll just ask one last question then. If there was one thing that you would wish for the UK to really take the lesson from the Australian market, what would that be in your opinion?

Nick: Gosh, look, I think I always mention this, obviously, we've touched on some issues around investment and fund consolidation, the post-retirement but I think it's really important to get good data on your system, how the funds, the schemes, the providers, how they're performing? What's the return after fees? What is giving the best return, fundamental research to make informed decisions on, to improve the system?

Now, we've been fortunate in Australia where we've had very, very good data on the system and the operators within the system which has been really useful. I've long wanted to see really good data on what's been happening in the auto-enrollment environment. That would be my pretty basic fundamental message but the other issues, are multiple accounts, fund consolidation, default investment infrastructure, mergers, and the retirement income piece. I think they're the critical areas to focus on going forward

Sangita: The quality of data, the transparency of data that you have as well in Australia. Isn't it? You make that information available to people so they can see how funds are performing and you can interrogate, and we don't have that level of rigour still here in the UK?

Nick: Absolutely. Look, I mean, most members don't pay out a lot of attention, however, it is still important to have it. Look, we're very fortunate, we have really good data on long-term investment performance of the default and different options. It's not so much used by individual members, although our annual reports require it, but it's very useful for making evidence-based decisions about improving the system. I think that would be a really good improvement to the UK system if you can get that.

Sangita: That takes us to time. I want to say a very special thank you to you, Nick Sherry, for joining us for this fascinating discussion.

Nick: It's been a pleasure. I've long held an interest in the UK system. I've watched its development and the debates over the last 30 years, I've been a regular visitor and I look forward to many more visits and returning again in the near future to see how the system is evolving and developing.

Sangita: Thank you, Nick. Well, we wish you a speedy recovery to full health from COVID and I'm sure we'll see you again soon on your next over in the UK, I've certainly found this discussion very interesting and I hope you have too. Thanks for listening to the latest Thinking Forward podcast. There will be another episode soon, bye for now.