Compulsion and choice: Lessons from the Australian pension model

Compulsion and choice: Lessons from the Australian pension model
Map of Australia. Selective Focus.

Article by: Roger Brosch

In his latest article for Professional Adviser, Roger Brosch explores what the ‘super’ Down Under means for pensions up here

Compulsion isn’t a word many of us readily associate with the thousands of Britons spending time living and working in Australia.

I certainly didn’t have to compel my 24-year-old son, Joe, to try his luck Down Under, where he’s now working (and playing rugby!) in Sydney after finishing his degree. Wild horses wouldn’t have stopped him, to be honest! 

But in the financial services world, especially pensions, compulsion – the action or state of being forced to do something – does come to mind when we’re on the subject of everything from Ayers Rock to eskies (I’ll come back to this affectionate truncation later). 

That’s because the Australian pension model is much admired for its far-sighted boldness in forcing, yes, forcing workers to both join and gradually increase their contributions into workplace schemes as they progress in both experience and income through their working life. 

The result? A defined contribution pension system that, while not perfect, is far closer than ours to delivering the prospect of a realistic income in retirement. 

This compulsory element of the superannuation or “super” industry as it’s often, well, affectionately truncated to, was launched in 1992. 

Twenty years later, the UK introduced its version of this model with the dawn of automatic enrolment (although it’s not compulsory), a policy which almost all agree, has been that rare thing: an unqualified success in pension legislation. 

But I’ll tell you what’s not truncated, the contributions you make into a super. Joe’s employer is now paying 11.5% of his earnings, way above the minimum eight per cent between £6,240 and £50,270 that is required for automatic enrolment in the UK. 

It’s also worth pointing out that here, the employer only has to pay 3% of that 8% – the other 5% can be taken from the member’s pay packet. 

Imploring people to save at all into a pension is hard enough, let alone beseeching them to put away more but this is the effort the industry is continually striving to achieve.

‘Innate resistance’

I think Australia’s politicians recognised this innate resistance which is why, in a land famed for its freedoms and laid-back culture, they took the decision on behalf of their electorate with no ifs and no buts. Thirty-two years later, it’s hard to avoid the conclusion that it was inspired. 

We could do with a bit more Antipodean inspiration when it comes to the current debate over what to do about the millions of small pension pots people ought to bring together to help them get a better handle on their savings. 

In Australia, “sweeping and stapling” is already tackling this issue. 

Sweeping is the mechanism for ensuring even small, inactive pots follow a worker from job to job, with the funds automatically transferring to the member’s pot with the biggest balance.

Meanwhile, stapling, which was introduced three years ago, creates a pot for life by ‘attaching’ the member’s current super fund to them as an individual so they take it with them when they change jobs – unless they proactively opt to move it to an alternative super. Choice to complement compulsion, if you will. 

Here, the pensions dashboard will undoubtedly help this process – if it can overcome its extended gestation.

In the meantime, the forgotten pot issue is one of the reasons the industry is behind initiatives such as National Pension Tracing Day, which encourages people to do their own detective work on digging up previous pensions, some £27bn in total. 

These touchpoints, how much you save and who with, are, or should be, part of an enduring, ongoing conversation in the UK, with employers and their people at its heart.

I feel these are where the next advances will be taken with new approaches to animating the way people think about saving for life after work. 

And talking of after work, one aspect of Australian culture I admire is its friendly familiarity. There’s nothing nicer than a chilled “stubby” (short beer bottle) from the aforementioned “esky” (a coolbox). 

Certainly no compulsion required for this activity.  And it’s worth considering further still how we can continue to harness this spirit of positive choice to help people make the right call on their pensions.

Roger Brosch is chief executive at Foster Denovo