PensionsJul 17 2014

The Australian way

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Pension changes in the UK that will ultimately let pensioners do whatever they wish with their pension have prompted suggestions that the profligate will simply blow the lot on a Ferrari, but that is not the experience seen in Australia, where you can already do what they want with your Superannuation fund.

This, quite clearly, is not happening there. In fact, the experience Down Under is very different from that in the UK, as pensioners there have generally got significant pension pots thanks to the compulsory pension savings regime implemented back in 1992, but fewer options on how to turn them into income at retirement.

Jeremy Cooper, chairman, retirement income for Challenger – who undertook a complete review of the Australian retirement market back in 2010 – said: “The biggest difference in the UK to Australia is the 100 years of compulsory annuity purchases. In Australia, we have not had that.

“In 1992, all contributions to pensions became compulsory for employers. It drives the pensions concept into every household.

“They have money paid into a pension and you have TV advertising for pensions because you can choose to move your Superannuation to another fund.

“This brings it into households. But there is also a difference in outlook, so right now the household savings ratio is 5 per cent of disposable income in Australia, but in the UK it is 9.7 per cent of income they have available.”

Contributions to the Australian Superannuation schemes are at 9.5 per cent, and the Australian system does not allow employees to opt out of their Superannuation schemes, unlike auto-enrolment in the UK.

Trying to make pension contributions compulsory in the UK would have undoubtedly made it more difficult to get employers and employees behind the concept, as there is clearly a cost to both for a long-term gain but short-term pain when it comes to cashflow.

That said, while there was opposition to compulsion in Australia when it was initially mooted, Mr Cooper is clear that at the time compulsion was implemented, there was a perfect economic and political storm that enabled the measures to be passed into law.

He said: “In Australia, we had a real political moment, we had a lot of things that were lined up, and by some good footwork everything was right to push the button and get compulsion going.

“On a grander scale, the politicians that were in favour of this had to look at it from an economic point of view. Workers were becoming more productive and people were looking towards this in a more holistic way.

“It puts money into safer places, but it also [ties up] wages that would otherwise be spent on the high street, and it does all sorts of different things to the economy.”

Thanks to the TV advertising, there is generally a higher awareness of pensions and pension saving in Australia than in the UK, but do not mistake that for the system being infallible.

While the amount of pension saving in the Australian system is significant at US$600bn (£350bn) – which amounts to one-third of all assets in the system – these actually belong to roughly 9 per cent of the adult population. These are the older generation – the average age is roughly 56 said Mr Cooper – and they are also wealthier.

Despite the compulsion to pay into a pension, roughly a third of adult women in Australia still have no Superannuation at all.

Mr Cooper said: “This is because you have an older generation of people, women who were 60 years old when compulsion came in, and you have to have a job to benefit from it.

“If you are not in a job, you do not get a Superannuation fund, and roughly 33-34 per cent of adult women are in that position. It is a growing issue.”

In the UK, by contrast, the separation of pensions and employment through the stakeholder pension has helped to provide access to pension saving for a group of people that would otherwise have been excluded from retirement savings altogether.

Yet despite the larger amount of advertising and promotion of pensions and the options available that is prevalent in Australia, there are still roughly 1m people who do not know what superannuation is, said Mr Cooper.

It suggests that no matter how much promotion is made of retirement options in the UK, there will still be some people who do not engage with the process. The irony of comparing the two systems is that just as Britain is looking to remove the need to buy an annuity at retirement, Australia is considering implementing exactly that. He added: “It does not mean they are idiots, but they do not engage in this kind of stuff. That is why we are going for a default option, even though they are not making any response to that.

“But how can a normal person make a decision about longevity risk and the impact of inflation?

“So there is a good reason to have a default product.”

One of the key elements of helping those in Australia and the UK to get the most out of their pension is to have more advisers who are specifically trained in these areas.

Mr Cooper said: “In Australia, we have a very big number of post-war baby boomers who are all retiring, and the advice even leading into retirement is incredibly different from just saving and investing.

“There is a need for a lot more advisers to be trained in this stuff. It is not that ‘the yellow fund is better than the blue fund’.

“We have to look at far more interconnected issues, such as possible income needs, a lower appetite for risk and so on, which is pretty heavy stuff and requires someone who is trained to look at it.”

Many Australian pensioners, as UK ones, are using at least part of their pension fund to pay off the mortgage on their family home rather than “buying a Ferrari” said Mr Cooper. The pensioners feel more comfortable having used some of their, say, A$200,000 pension fund to pay off their family home, but they consequently have no income.

He added: “I would say very firmly they do not fritter the money away. But there are worrying signs that they are moving into retirement more exposed to risk than they should be.”

The other thing that many Australians do with their superannuation is take it out of their pension and put it into a bank account, as that is something they understand and feel comfortable with.

Of course, the problem in the UK is that with low interest rates there is unlikely to be enough income generated to live on without touching the capital.

Mr Cooper said that “in a perfect world” one would look at telling them to invest the money, but that “in a compulsory world you have to have a bit of sound logic, and if they want their money in the bank, who are we to tell them otherwise?”. For advisers, this could be one of the most important questions they ask themselves and their client.

Alison Steed is a freelance journalist