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

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For many in Australia’s superannuation industry there is one principal measure of value for money: net benefit outcome. 

Value for money was widely discussed in 2023. In July the government published a response to its consultation on a value for money framework for defined contribution schemes.

The consultation made clear that value for money was also about savers getting good value from their investment and receiving a quality level of service. Costs and charges are very important, but not the only driver.

When it comes to pension reform, Australia’s superannuation model is often cited as one that the UK can learn from, and perhaps even emulate.

So how does Australia perceive value for money, and what are its views on retirement income?

To understand more, we 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.

 

Value for money 

In Australia, value for money has been essentially codified as a legal duty for trustees to act always in the members’ best financial interests. This has been coupled with a performance test, applied by the regulator, which assesses investment outcomes against pre-determined benchmarks – with onerous consequences for failure.

Value for money can be a subjective and personal matter, says Watson. But many in the superannuation industry in Australia think there is one principal measure: net benefit outcome. 

“This is measured simply as contributions and investment earnings, minus costs, fees, taxes and premiums that may apply to the account. 

“As a straightforward and comparable measure of value for money, net benefit outcome has several advantages: it can be measured in absolute terms, and also measured in relative terms against peers and competitors, and by regulators against a fund’s own strategy and performance benchmarks. It is also relatively easy for members to understand.”

Net benefit outcome is also the typical measurement used for superfund league tables, which are widely used in Australia (see, for example, Top 10 Super Funds – SuperRatings).

That said, it is no longer enough for Australian funds to simply focus on “growing the pot”, notes Watson.

 

Retirement income

Australia’s Retirement Income Covenant (RIC) came into force on 1 July 2022. It requires trustees to formulate and deliver a retirement income strategy, a summary of which must be made publicly available.

“If the UK pensions system follows the Australian pathway, then I wouldn’t be surprised if something similar to the RIC was eventually rolled out in the UK,” says Watson.

So how does the RIC work in practice?

The retirement income strategy must outline how the trustees will help their members to achieve and balance three key retirement objectives:

1. Maximising their expected retirement income
2. Managing expected risks to the sustainability and stability of their expected retirement income (including, at a minimum, longevity, investment and inflation risks)
3. Having flexible access to expected funds during retirement

Typically, a fund’s RIC will consider the possibility of different strategies for different cohorts of members. It must also factor in the (means-tested) Age Pension and tax implications for their members.

Since the RIC came into effect, the Pension Regulator has completed a sampling review of the industry’s RICs. The review found that, overall, “There was a lack of progress and insufficient urgency…in embracing the retirement income covenant to improve members’ retirement outcomes.”

Despite this, Watson says the RIC has improved the Australian Retirement system. “It’s provided superannuation funds with greater certainty and helped to spur innovation.

“With a ‘silver tsunami’ coming Australia’s way, there’ll need to be much more focus on retirement income.”

 

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.