Gregg McClymont: Comparisons to the Australian system should be drawn carefully
As the UK embarks on a new era of pension reform, it’s tempting to look abroad for ready-made solutions. Australia’s superannuation system and Canada’s public sector pension giants are often held up as models of scale, efficiency, and member outcomes – not least by me.
But as someone with experience of both the UK and Australian pension environments, I would emphasise that comparisons should be drawn carefully and with sensitivity to differences, as well as similarities, in structures.
As I explained recently on Brightwell's Pensions Unpacked podcast, the Australian system's success is rooted in its clarity: almost everyone is in a defined contribution (DC) arrangement, with compulsory participation and a single default fund for each sector of the economy.
This model has enabled Australian funds to act with long-term member first purpose, achieving scale, investing heavily in private markets, and delivering robust outcomes for members. The creation of IFM Investors is a telling example of the model – the funds came together collectively to create their own investment manager in direct response to their requirement to access to infrastructure investments at the right price point and with as much of the returns as possible flowing back to their members, something the UK is now seeking to replicate.
But the UK's starting point is somewhat different than Australia's. Our pension landscape is fragmented, shaped by a legacy of defined benefit (DB) schemes, growing local government DB funds, and a new mass DC system under auto-enrolment (AE).
AE is both similar to the superannuation system – ‘soft' UK compulsion versus ‘hard' Australian compulsion - and quite different since Australian mass DC is delivered by pension funds organised on a sectoral basis. Perhaps the most striking example of difference in this respect is how the sector wide pension funds solved the problem of accessing private markets. They created IFM to do this in the midst of an opportunity to acquire from the Australian government core infrastructure which was in the process of privatisation. There was no ‘supply side' question of the type which confronts UK DC funds.
The efficiency of scale is a more straightforward lesson from Australia (and from Canada with respect to public sector DB). Larger schemes can more easily drive down costs, improve investment governance, and unlock new allocation opportunities. The government's push for consolidation, setting ambitious asset thresholds for DC schemes and pooling local government funds, reflects this logic. But scale is a means, not an end. It demands robust governance, transparency, and a relentless focus on member outcomes, without which bigger funds risk becoming unwieldy or losing sight of their purpose. The Australian funds do offer lessons on how to get this right.
Likewise with respect to raising contribution rates, a key factor in Australia's success, and one which reflects a process of gradual increases carefully communicated in advance by government reflecting agreement reached by employers and trade unions. While there is a difference – superannuation compulsory contributions of 12% come entirely from the employer, the UK Pensions Commission's skill and dexterity will be critical in creating a pathway that learns from the Australian contribution ‘step-up' approach.
A further lesson from Australia is that significant allocations to domestic markets are achievable without government mandation. While it's understandable that the UK government would want pension capital to support UK infrastructure and the energy transition, incentives, not compulsion, are the way forward. Australia of course has long provided significant tax relief on domestic equity holdings, while the publicly owned Clean Energy Finance Corporation (CEFC) has crowded in private capital through various kinds of blended finance. UK public finance institutions like the National Wealth Fund and British Business Bank have a critical role to play in de-risking and co-investing in new projects, especially as we move from buying existing assets to building new ones.
Ultimately, the Australian system is similar enough to make comparisons with UK DC valid, and with its thirty-year head start in mass DC development, it would be foolish not to look ‘down under' for AE inspiration. But since each pension system has its own distinctive national history, attention to differences as well as similarities is important if the right lessons are to be learned with a view to improvements in UK DC pension design.
Gregg McClymont is executive director of public affairs Europe at IFM Investors
