Reviewing Governance of Funded Personal Pensions in Australia and the UK
NOEL WHITESIDE, UNIVERSITY OF WARWICK, UK
28 February 2016
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While there are many differences between the Australian and UK super (pension) arrangements, following the introduction of auto-enrolment in the UK in 2012 they are increasingly similar market-based systems. Less stable returns for superannuation (pension) funds in recent years have prompted governance reforms, both in Australia and the UK, designed to improve performance and reduce costs. This paper reviews governance issues within personal funded pensions in both countries, focusing specifically on costs incurred. Although reforms are still underway, the paper concludes that due to regulatory changes compliance costs have tended to increase over time, and thus are likely to raise overall management expenses, thereby exacerbating the very problems these policies seek to address. *
This paper identifies the principal factors which exacerbate super (pension) fund costs. It also notes that the advantages of economies of scale are partially realised in Australia, but not in the UK where funds continue to proliferate. There are problems in measuring overall costs but, according to official measurements, these are apparently higher in Australia than in the UK.
The paper then reviews the main policy initiatives adopted in each country to correct these issues, noting how Australian governments, past and present, have retained greater faith in the merits of market competition than have their UK counterparts. It argues that new UK regulations will prove far more invasive for pension fund management and investment practices ─ and possibly more expensive as a result.
Thanks to a buoyant economy, fund performance has won the system extensive popular support in Australia, whereas, in the UK, unstable returns on funded pensions over the past 15 years have meant that auto-enrolment was introduced in a context of greater public suspicion. As a result, UK state interventions to secure better market performance have been more extensive and heavy handed (e.g. the use of caps to lower fees, and interventions to reform investment strategies).
Key regulatory reforms in Australia and the UK in recent years have included the introduction of state-sponsored default products (MySuper, NEST) with lower charges designed to reduce all costs through market competition.
In Australia, the Financial System Inquiry highlighted the fact that recent reforms had failed to reduce fees to any appreciable extent. Its report advocated more state intervention, in the form of a competitive process to allocate new default fund members to MySuper products, to sharpen market competition as a means of securing greater transparency and lower costs.
The paper suggests that while super fees are falling slowly, this is most likely due to the consolidation of providers and these scale effects have largely been offset by rising investment expenses (see figure).
Factors contributing to Australian super fees
Source: Financial System Inquiry: Final Report, 2014, Rice Warner.
In the UK, where a review of transaction costs is due in 2017, there has been a longer history of trying to reduce charges, although with mixed results. There, the issue of charges has been highlighted by the introduction of auto-enrolment. Management fees charged on employer default funds have been capped at 0.75 per cent and consultancy charges are outlawed. However, asset management fees continue to be opaque and greater transparency remains a major concern.
Arguably, Australia’s policy response in terms of the reduced number of funds and the consolidation of multiple accounts has been superior to that of the UK. There has been talk of a UK ‘pensions dashboard’ but little progress has been made due to the multiplication of funds following auto-enrolment and the administrative complications this has generated. As a result, few contributors to UK pensions have much idea of how much they have saved or what their future pension income is likely to be.
Governments in both Australia and the UK have reviewed the tax relief on super (pensions) contributions available to higher incomes earners. With continuing pressure on the public accounts, it seems unlikely that present settlements can be sustained, and decumulation will receive more official attention. There is no equivalent of MySuper or NEST at the point of liquidation of pension savings, to serve the needs of the small saver who still forms the greater part of the retiring population, is more liable to reach poor decisions at key moments and, therefore, is more likely to end up reliant on the state for income supplementation in later life.
* The author would like to thank Bernard Casey who generously sent on recent documentation relating to issues raised in this report. The analytical framework, however, remains her own.
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