Both New Zealand and Australia are assessing myriad complex pension policy options. David Harris says the UK would do well to study these developments
Two countries in particular have helped to shape thinking and public policy around pensions in the UK over the past decade. The experiences of New Zealand and Australia have shown politicians and regulators what could be the natural progression of auto-enrolment, the development of master trusts and related governance oversight.
In 2007 New Zealand embarked on an employee choice-centred, auto-enrolment solution: KiwiSaver. The former director of the Pensions Policy Institute, Dr Alison O'Connell, "waxed lyrically" about the early successes of the system. And yes, it had some real positives. It helped address the chronic collapse in occupational pension coverage (around 30% of full-time workforce in the late 1980s to below 15% by 2006) that had resulted from changes in the taxation approach during the late 1980s from EET to TTE. Capital gains taxes were abandoned which decimated the small annuities market.
Government involvement was significant in the forging of a clearance hub for payments and data, along with a consumer-centric dashboard, powered by the Inland Revenue Department. But this far down the road a challenge still remains. Contribution rates - on average 3% for both employee and employers- are stubbornly low. In addition, opt-out rates are growing and there is no re-enrolment provision except when changing jobs or when employees take contribution holidays. First-home owners are using their KiwiSaver accounts for initial deposits and stunted retirement incomes solutions are encouraging buy-to-rent investments. So, yes, New Zealand was innovative with KiwiSaver but it hasn't fixed the retirement income problem entirely.
This year, New Zealand will embark on its triennial review of the system. The 2019 Review will examine the fiscal sustainability of current settings of the state pension and the impact on future generations. Dr Susan St. John from the Retirement Policy and Research Centre, University of Auckland says: "Strikingly, in line with the government's emphasis on wellbeing, the terms of reference prioritise the effectiveness of current retirement policies for financially vulnerable and low-income groups, and recommendations for any policies that could improve their retirement outcomes."
Other specific topics include: the level and types of fees charged by KiwiSaver providers, the impact fees may have on KiwiSaver balances, ethical investments and decumulation of retirement savings and other assets.
Three hours flying time to Australia, a different review is under way. Here the retirement framework is encountering deep thought about the conduct of leading financial services providers, behaviour of individuals and the products for retirement planning and related distribution. The Hayne Royal Commission into financial services has revealed shocking evidence of advisory fees charged to customers who didn't have access to advice or couldn't comprehend the need for a financial product - for example, unsolicited selling of a product to a customer with Down's Syndrome. Simply put, governance frameworks failed, and major banks suffered severe brand damage. Some former employees may now face criminal sanctions.
At the same time, regulators were considered to be "asleep at the wheel" for not preventing some of the more adverse market conduct examples from occurring. As Calvert Duffy, leading Australian compliance professional of CJ Duffy & Associates and member of the Australian Securities & Investment Commission - the regulatory consumer panel - says: "Governance solutions were found to be inadequate and market conduct behaviours have been shown to be unacceptable through the optics of public opinion, regulations and criminal law." The Royal Commission's findings are detailed and elaborate and are likely to reconfigure the long-established industry landscape. A regulatory shakeout will impact all corners of the Australian pensions market. Also, merging of master trusts will continue at pace where trustees have to justify why "small is beautiful" along with the continued decline of in-house superannuation.
The Productivity Commission, a federal government agency, has added further complexity to the public policy debate on Australia's retirement framework through myriad recommendations. One of the main ones is that only the 10 best default funds can receive contributions from new members in the future. Such an approach mirrors New Zealand's default KiwiSaver carousel - where nine providers pick up member inertia with respect to investment choice and fund selection.
Both New Zealand and Australia are assessing myriad complex pension policy options. New Zealand's retirement review is assessing a broad swathe of public policy alternatives that include the special needs for women, retirement income outcomes and the decline in housing ownership. Australia's situation is more chronic, as public confidence in its retirement framework comes more under the spotlight.
The UK would do well to study these developments which are occurring half a world away for what may occur and develop, in a post-AE, master trust world.
David Harris is managing director of TOR Financial Consulting
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