Can UK Pensions Learn Anything from the Aussie Super System?

It’s just over 30 years since the introduction of the Super Act 1992 which transformed retirement provision in Australia. The super sector has grown from AUS$150 billion at inception to some AUS$3.4 trillion now, representing 160% of GDP.

It’s a compulsory system so, unlike the UK, everyone is in. Mandatory contribution rates have steadily increased from 3% to 10.5%, with the aim of getting to 12% by 2025. Importantly, contributions now start from the first dollar of workers’ income, with the AUS$450 a month minimum threshold recently abolished.

It’s a complicated system, particularly the tax rules, as Senator Nick Sherry acknowledges. The former Australian Government Minister has been a key player in shaping the Australian Super system. Originally involved in the creation of the Hesta Super scheme, which has now grown to AUS$70 billion, he recently took up a position as chair of TWUSuper, a much smaller scheme, but one that is clearly eyeing mergers and consolidation to deliver scale.

Sherry took the time to join us at the Natixis office to explain how the Australian experience could help accelerate the development of a better pension system in the UK. The super system, he says, is itself changing fast to better meet the needs of savers.

There have been a series of scandals and issues, most notably in the retail sector where conflicts between advisers and providers saw poor outcomes and higher charges. A Royal Commission, which reported in 2019, was designed to get a grip on the problems by setting out the fiduciary duty that should govern the actions and decisions of trustees and providers.

In addition to these reforms, the supers are seeing consolidation amid a shift away from retirement solutions provided through the retail/bancassurance model to public sector and industry-wide “profit for member” schemes (as opposed to profit for shareholders). Through this consolidation, we are now seeing the creation of mega funds. The largest – Fund Australian Super – now manages some AUS$244 billion of workers’ assets, while the Australian Retirement Trust has AUS$232 billion, Aware AUS$150 billion, and Uni Super AUS$110 billion.

The growth in assets and trust in the system is also driven by good quality longitudinal data that shines a light on performance and fees over the 30-year lifespan of supers. That transparency allows for the splitting of admin and investment fees – an innovation that I’d like to see adopted in the UK.

The Aussie system also focuses on publishing net returns, rather than just listing costs and charges. This is healthy: while no one wants to see excess costs in the pension system, low costs shouldn’t come at the expense of better outcomes and returns.
The scale that is being built up, coupled with transparency and an increased focus on “profit for member”, provides opportunities to drive better value and better outcomes.

So what exactly are the Aussies doing with the incredible scale of their supers? Well, for me, a key takeaway from Nick Sherry was investment innovation. In particular, how do we answer the exam question of delivering equity-like returns without the associated volatility? The answer: infrastructure and productive finance. But schemes need to invest in expertise to run and manage these types of assets.

Just take a look around UK infrastructure and the extent to which infrastructure assets are owned by Australian supers, whether directly or through a collective investment manager. To what extent do UK pensions schemes and providers invest in their domestic assets? To what extent do UK pensions invest in these assets overseas? I suspect you all know the answer.

There is a lot of good work going on within the industry and by government and regulators to unlock these types of asset classes. But pension funds will only invest in solutions that meet the needs of their members. This means getting the right risk-reward profile, at a reasonable cost, and solving the liquidity and daily trading conundrum.

So we need a pipeline of projects that are attractive, but we also need a change of mindset within the industry if we are to deliver better investment outcomes for pension savers. A drive towards greater scale will certainly help, but we also need imaginative solutions that open up more asset classes to DC members.

Investing in a cheap as chips passive tracker is no longer acceptable if we are to deliver better outcomes for members. We can definitely learn a lot from the Australian experience of delivering bigger, better solutions for the benefit of all pension savers.

Published in July 2022