David Harris says the UK still has much to do on pension reform and appears out of step with the global direction of DC.
The UK stands apart on the journey towards workplace defined contribution (DC) auto-enrolment. Other countries have taken this route at times of plenty and political unity; the UK has Brexit and its many ramifications, low contribution rates that must increase sharply over the next few years, and the minefield of complexity for employers and employees to navigate. Add to that pension freedoms that have emptied some pension savings pots into the taxman's coffers, and the future is not looking too bright for soft compulsion.
But then, all the countries that have tried to boost self-investment in retirement security have had some unexpected challenges. At the Barnett Waddingham DC Snapshot Conference on 21 September we had a look at a few of them.
New Zealand has a generous first pillar - the PAYE New Zealand superannuation benefit, which almost all retirees enjoy and is based on a residency test. The workplace auto-enrolled KiwiSaver was introduced in 2007 and is growing steadily in terms of assets under management but opt-out rates are increasing in certain sectors of the economy. It is proving expensive in terms of state support and operational costs. Their KiwiSaver 'dashboard' is generated by the Inland Revenue Department and is narrow in product coverage. Adequate retirement incomes are by no means certain for Generation Y and millennials. The ability to borrow from KiwiSaver accounts for home ownership and expanding long-term care and medical costs are major headaches for a newly elected coalition government.
Australia, like Denmark, has a means-tested first pillar benefits system and around 27% of male total weekly earnings is provided as an old age pension. The eventual eligibility age will increase to 70 years. Recently, Australia has become the third-largest DC pool of assets under management, passing Canada with £1.35trn assets. In-house corporate schemes number fewer than 40 and will continue to decline sharply in favour of industry-wide, master trust solutions. The growth in widely accessed alternative investment (infrastructure) solutions, especially in the industry funds sector, has helped to generate higher rates of return.
Flying from Sydney to Johannesburg, we see in South Africa a country transitioning from defined benefit (DB) to DC. DB structures are becoming extinct. In their place are master trusts and in-house trust-based DC schemes. Two interesting features are that flexible annuities have become more common, and annuities and drawdown products are being combined. Nevertheless, there is an inherent weakness in the system because moving jobs can release pension savings.
On to Denmark, where a compulsory second pillar is offered by the state, banks or life insurers. As with Australia, infrastructure investments in energy and renewables are rapidly occurring. A single and very elaborate dashboard has operated for more than a decade for pension and insurance products. It is widely used for retirement planning.
In Dublin, where just 30% of the private sector workforce has occupational pension arrangements, Taoiseach Leo Varadkar has announced his wish to introduce a universal pension scheme based on auto-enrolment starting in 2021. A national strategy paper is to be released before Christmas to aid in the process of the final auto enrolment framework. Little if any consumer appetite exists for a dashboard.
Conversely, the United States is in a form of political turnaround. Many of the Obama retirement and pension initiatives are being unpicked. Static levels of 401(k) coverage and low contribution rates still see the majority of American retirees relying on the first pillar, social security benefit.
And back into London, the UK has still much to do in the arena of pension reform: DB to DC transition, bedding down higher auto-enrolment contributions, master trust consolidation and the old thorny problem of financial literacy are just some of the challenges. It is an imperative to think global and act local.
David Harris is managing director of Tor Financial Consulting
Phoenix Group will launch an ESG defined contribution (DC) default solution for pension fund clients of its Standard Life Assurance business and their scheme members.
In the first of a five-part series of articles for PP, pensions minister Guy Opperman sets out how impending legislation will improve pensions for members.
Newton’s Curt Custard considers the investment outlook for 2021 and the implications for DC schemes
Tim Shepherd and Beth Brown look at the legal implications of working from home and how pension professionals can mitigate the risks.
Master trusts’ investment strategies have grown and become more sophisticated over the last three years, but “growing pains” are hindering progress, according to the Defined Contribution Investment Forum (DCIF).