Why UK pensions revamp can benefit from leaning into Australia's model
In the wake of the UK government's “pot for life” pension proposal, industry experts are drawing lessons from Australia's superannuation system.
The proposal, reaffirmed in the 2024 Spring Budget, aims to simplify pension management, reduce costs, and improve retirement outcomes for British citizens.
However, to successfully implement an Australian-style system, the UK would need to establish a robust payments infrastructure, implement regulatory reforms, and most likely launch a comprehensive consumer education program.
A daunting task, but major reforms are necessary to create a healthy pension model, according to Andrew Boal, partner, actuarial consulting at Deloitte.
"The superannuation system in Australia has been very successful. It's grown to be one of the largest private pension systems in the world. That's only come about through a number of significant legislative reforms over the last 30 years,” Boal told AsianInvestor.
FRAGMENTATION ISSUES
The push for reform in the UK comes amid several challenges in its pension system.
For example, while the auto-enrollment (AE) system introduced in 2012 has successfully increased pension participation, bringing millions of workers into workplace pension schemes, it has also led to a proliferation of small, fragmented pension pots.
Research published by the Department for Work and Pensions (DWP) in early 2023 revealed that over 12 million pots worth less than £1,000 ($1,270) were no longer receiving contributions.
Deloitte
This fragmentation not only complicates retirement planning for individuals but also imposes significant administrative burdens on the pension industry, said Boal.
"Australia introduced legislation to deal with inactive small accounts to prevent fee erosion over time,” he said.
“If you don't contribute to a fund or perform any other prescribed activities for a period of 16 months, and the balance is under A$6,000, it gets classified as an Inactive Low Balance Account (ILBA).
The amount is sent to the tax office to prevent fee erosion and, where possible, the tax office will then proactively transfer it an active account in your name.”
CONSOLIDATION WORKS
Portability, a streamlined regulatory framework that encourages funds to collect money on your behalf from your previous super funds, is a key feature of the Australian system, said Boal.
“The latest legislation in Australia, called stapling, even requires your new employer to offer the option of contributing to your existing fund rather than setting up a new one. You can choose to stay with your current fund or opt to join the new employer's fund and have your existing savings transferred," he said.
The Australian super industry heavily promotes consolidation, and gives individuals greater control over their retirement savings, fostering engagement and encouraging long-term financial planning.
“Many superannuation funds will offer to consolidate your previous super accounts when you join them. They handle the process once you give them authority, which is also in their interest as they grow their assets under management,” said Boal.
Scale and efficiency are another key strength of the Australian system. Larger pension funds can achieve economies of scale, enabling investment in a diverse range of asset classes. This approach helps to achieve risk diversification and more stable returns for savers in the long term.
"In the APRA (Australia Prudential Regulatory Authority) regulated environment, more than 95% of assets are with the top 25 funds. In Australia now, the large corporates have almost completely stopped running their own superannuation fund, and as a result there's a smaller number of industry and retail super funds who compete for members."
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The Australian system also addresses other challenges faced by the UK.
It mandates higher contribution levels, with employers required to contribute at least 11.5% of an employee's earnings - increasing to 12% from July 1 2025 - compared to the UK's minimum of 3% under AE.
This higher contribution rate helps ensure better retirement outcomes.
Additionally—unlike the UK— the Australian system is mandatory for almost all working adults, reducing the risk of individuals being left behind in retirement planning.
CHALLENGES AND IMPLEMENTATION
While the potential benefits of adopting an Australian-style pension model are significant, implementation in the UK would also require overcoming a gap in financial literacy among its citizens.
Although 53% of UK workers contributing to workplace defined contribution pensions view the pot for life proposals positively, there is a significant crisis of confidence regarding financial decision-making, according to research by UK-based actuarial and consulting firm Barnett Waddingham.
Nearly half of the respondents (49%) express concern about making poor decisions when selecting a pot, with this anxiety particularly pronounced among women (53%) and those aged 51-55 (58%).
This lack of confidence is compounded by a significant financial advice gap.
The Financial Conduct Authority (FCA) reports that only 8% of UK consumers received full financial advice in 2022, raising concerns that the pot for life model could exacerbate inequalities, benefiting those with more financial literacy and resources while leaving others at a disadvantage.
By tackling fragmentation, improving economies of scale, and empowering individuals to take control of their retirement savings, the UK could comprehensively improve its pension landscape by adapting lessons from Australia's model.