Pot for life: lessons from Australia’s stapling model

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The Australian system doesn’t suffer as much from small pots as the UK and members have more choice of fund. But this wasn’t achieved overnight.

Recent government announcements have sparked discussion about the possibility of a “pot for life” pension model in the UK.

Australia’s “stapling” model is often cited as one that the UK could learn from – and perhaps even emulate.

In Australia, they don’t suffer as much from small pots and employees have more say over their choice of pension fund. But is everything in the Australian system quite as good as it seems?

We recently spoke to Paul Watson, one of Australia’s leading pension experts. Paul has held senior executive positions in several of Australia’s best performing superannuation and pension funds, including Hostplus, Military Super and Australian Reward Investment Alliance.

Below is a summary of our discussion with Paul, who spoke about “stapling”, the importance of financial “plumbing”, and what Australia’s experience might indicate about future policy reform here in the UK.
 

Pot for life?

In Australia, employees’ super accounts (pots) are "stapled" to them. This means the pot automatically follows them from job to job. Employees can remain stapled to their existing fund, or can unstaple themselves, choose another fund and re-staple themselves to the new provider. 

If people entering the workforce for the first time don’t nominate an initial default fund, their employer needs to enrol them in their default plan.

This model was introduced in November 2021 as part of the government’s “Your Future, Your Super” reform package. It means that the employee is now the principal decision-maker in terms of where their mandated superannuation is paid. 

However, the practical consequences of this shift in decision-marking can perhaps be overestimated, says Watson.

In practice, the large majority of employees remain stapled to their “first and often only” default fund. And many employees still elect to defer to their employer’s default fund when choosing their initial fund to be stapled to. So for now, at least, inertia rules.

"This model hasn’t disrupted the role and centrality of the employer in pension fund selection and delivery,” says Watson. 

“Arguably stapling has had another effect, with most employers taking even more care when choosing their default fund. As a result, superfunds are still very focused on targeting and engaging employers.”

With most people sticking with their default fund – which they acquired when first entering the workforce – seemingly it would make sense for funds to target employers that provide lots of first jobs?

“There are about 70 default pension funds in Australian market. But several of these funds that generally cater for workers in the hospitality and retail sectors effectively have a first-move competitive advantage, because approximately half of all new starters in the workforce annually are in these sectors,” says Watson.

Stapling will assist in reducing small and lost pots. However, it doesn’t prevent an employee from being stapled to a bad fund, says Watson, who was personally in favour of a pot-follows-member model when stapling was first introduced in 2021. 

“Currently, our stapling model risks people being stapled to a ‘dud’ fund that might be high-cost and low-performing, or might no longer be optimal or compatible with their current occupation. 

“For example, a person may be stapled to their initial default fund when commencing work for the first time, say in retail or hospitality, but later move into a role that has distinctive traits. Their later role might be classed as a dangerous occupation for life and disability insurance risks compared with their old job, and a different default fund more attuned to their new role or industry might be better suited to their needs and requirements,” says Watson. 

So why aren’t more employees in Australia actively choosing their own fund?

“A regime that allows members to more actively select their fund was expected to lead to more money being spent by superfunds on engagement initiatives and broader marketing to encourage people to choose their fund,” says Watson. 

“However, based upon research I’ve seen, it appears that most members still feel they don’t know enough about pensions to confidently make such a decision themselves. Instead, they continue to place a lot of trust in their employers to have made a good decision in selecting and maintaining a quality default fund for them.”

 

Financial plumbing 

A key foundation that enabled Australia to move to the “stapling” model was the development of its financial "wiring and plumbing": a banking-like administration and clearing network to enable the quick, easy and secure transfer of money, data and records. This system took years to put in place.

In Australia, if a member chooses a new fund there’s no automatic consolidation of their accounts, but member-initiated consolidation is very quick and easy. 

A key step in the Australian pensions industry creating this effective financial ecosystem was its creation of a voluntary code of "transfer protocols", which had to be as frictionless, cost-effective and secure as possible. 

Another key step was establishing purpose-designed clearing houses to facilitate the transfer of money and data between employers and funds. It now takes just two business days to move money between funds (at least, this is the expected standard). 

Watson thinks that in some circumstances this may be too efficient. 

“It’s impressive that funds can move money and data efficiently. However, this is people’s long-term retirement savings, and in light of member choice of fund, there’s cause to reflect on whether we should probably add a bit of friction back into the system, so that people aren’t encouraged to move their super around rashly,” says Watson.

 

One dashboard

Australian superfunds are required to provide a lot of detailed data across all members’ pots to one of its regulators, the Australian Tax Office. This tax office leverages the data to inform and provide one pension dashboard, which it administers. 

Every Australian that receives super has access to this dashboard, via an Australian government portal ‘MyGov’. They can view this dashboard at any time and can also elect to consolidate pots here, via a mouse-click. 

Without similar fundamentals in place in the UK, Watson believes it may be hard to achieve the ‘pot-for-life’ aspirations with a similar efficiency – while maintaining savers’ confidence in the retirement ecosystem.

 

Next steps

Read more about what the UK can learn from Australian’s superannuation system here:

Illiquid asset investments: can the UK emulate Australian superannuation?

Value for money: what can the UK learn from Australia?

 

The opinions expressed in this document do not necessarily reflect the views of Standard Life.