Three things DC needs to get right – lessons from Australia

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Australia introduced compulsory DC pensions in the 1980s, and this head start means UK policymakers and trustees often look to it for lessons to learn. 

Speaking at an event organised by consultancy XPS on Thursday, a former Australian minister for superannuation and corporate law, Nick Sherry, gave insight into the system Down Under – and the challenges it still needs to overcome. 
  
Sherry was involved in drafting the legislation that led to a minimum contribution increase from 3% to 9% and also worked internationally, advising the Greek government on its pension system five years ago. 
  

Lesson 1: Get rid of entrenched underperformers 

  
The central part determining good or bad outcomes in DC, according to Sherry, is the design of the default option and its investments, for which providers and funds are responsible. This shift away from employers determining an outcome through DB provision to funds’ governance and investments will receive much regulatory attention in the future, he predicted. “The government and regulators are going to watch carefully what funds are doing, is the member at the  centre of decisions, is the fund large enough,” he said. 
  
Size in particular will matter; there is a clear correlation between fund size and member outcome, said Sherry, who recently helped merge two supers which each considered themselves too small to survive individually – they had AUS$16bn and AUS$10bn of assets under management.  
  
Funds need to question not just their size but their performance annually, he added, and benchmark themselves against other funds, ultimately leaving the market if performance is consistently worse in comparison. A 2018 report by Australia’s Productivity Commission called these funds “entrenched underperformers”, identifying them as one of the problems with the super system. 
  

Lesson 2: Beware of the dynamite in lost pensions 

  
Another “structural flaw” the report identified was the presence of multiple accounts – deferred members. Their number has been growing fast in the UK as well. Sherry said there are 27m accounts for 12-13m people in the Australian workforce, around two for every person. The UK had 18m deferred entitlements (including DB) in 2018, up by over 2m in a single year largely due to auto-enrolment. 
  
Deferred entitlements are easily lost; in Australia, between 6m and 7m pots are classed as such according to Sherry, many of them belonging to British workers who have left Australia. Sherry said lost accounts are political “dynamite” in Australia “because it’s so inefficient but it’s a hard problem to solve”, even with the system of unique identifier numbers that Australia operates. 
  
“The reason I warn about this is, there has been significant criticism about multiple accounts. People pay multiple fees; it’s even worse if there is compulsory insurance that they… never claim,” he said. 
  
In the UK, the Association of British Insurers commissioned research from the Pensions Policy Institute on the scale of the issue. The PPI estimated that about £19.4bn in DC pension entitlements is lost to their owners.  
  
The government is hoping that the pensions dashboard will help address this issue, although its reliance on clean pension fund data could yet be a sticking point. Helping members find their lost pensions on the dashboard – or reminding them that they have them – might prove difficult if schemes don’t have correct details for them. The Pensions Regulator is keenly aware of this and on Wednesday ordered 400 schemes to look at their data quality – partly in preparation for onboarding to the dashboard. 
  

Lesson 3: Get your post-retirement package sorted out 

  
Lost pensions are a shared concern by Australia and the UK. The difficulty around retirement options are as well. Sherry called lump sums one of the failings of the Australian model, saying that Australia’s retirement options are “embryonic”. Australia has also been rocked by scandal, as bank-owned providers charged unnecessary fees and advisers were found to be conflicted. 
  
We have to manage these conflicts,” he observed, and the country has since banned commissions, but advisers have to be part of the system, he said.  
  
Some supers now have advice as part of their offering. Sherry said this needs to be holistic retirement advice as Australia also has compulsory insurance and a means-tested state pension, while care is not supported by the state.  
  
People need help finding out what institutions to approach for care, and “the really interesting funds in Australia are adding that package of solutions”, said Sherry. “My message is, ‘Get your post-retirement package sorted out as a fund.”
   

How should the UK tackle the issues of poor performers, lost accounts and holistic post-retirement provision?


Danny Vassiliades
Gregg McClymont
Darren Philp
 
Ben Ward
 
Chris Curry

Maria Nazarova-Doyle
 

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