With a high level of saver and engagement and a mandatory 11% employer contribution, the A$3.5trn Australian Superannuation market is a global success story.
Following the recently announced pension reforms as part of the Chancellor’s Autumn Statement, Bravura Solutions’ Nicole Kennedy, head of Sonata Alta, and Jonathan Hawkins, principal business consultant, outline some of the best practice ideas the UK pension world could learn by looking down under.
How does the UK pension system compare to that of Australia?
The Australian Superannuation market (Super) has matured significantly over recent decades. In the early 2000s, there was an abundance of schemes, and they were chosen by the employer. Systems, processes, and engagement between providers varied materially and were far from best in class.
In 2023, employees now typically have a choice as to which Super fund their contributions are directed, and where they can take their benefits on retirement as a lump sum or an income stream.
Eligible death and disability insurance premiums can be deducted directly from superannuation accounts, with default insurance coverage often required.
The UK has a rich pensions history but has built a huge range of products and schemes, for most people their workplace pension is their main source of retirement saving. Prior to auto-enrolment (AE) in 2012, workplace pensions were not offered by all employers, with large sectors of society not saving for retirement and relying solely on the State Pension. Since AE, most employers offer defined contribution schemes, and the link between pensions and group insurances has been broken, leading to an insurance coverage gap across the country.
The UK also has two regulators which oversee different parts of pensions savings, creating different rules and regulations and confusion for customers.
Similar to the Australia of the past, we have a multitude of products, systems, charges and communications, and a system where employers choose the pensions arrangement to which they will contribute for their employees. This creates a lack of individual choice, and many different retirement savings pots as people move jobs.
The UK does, however, have allowances and capability for innovative individual or family options for pensions – self-invested personal pensions (SIPPs) and small self-administered schemes (SSASs).
How has Australia managed to achieve high levels of pension saving?
Recent efforts have focused on consolidation of accounts (aka sweeping and stapling) aided by the Australian Taxation Office and regulators. Performance scorecards have also been surfacing underperforming funds to encourage individuals to take action to review their savings and fund of choice.
A significant portion of savings in Australia are held in ‘Profit to Member’ industry super funds, where fees are established to cover costs and profits are returned to members rather than shareholders or corporate entities.
Competition in the industry has increased, with a focus on cost, performance and overall member experience driving better outcomes for savers.
This has also driven the need for more efficient and engaging technology, and a move away from legacy tech that inhibited large-scale automation, access to data and real-time digital experiences.
The UK is lagging in various ways. Innovation, customer service and choice are patchy at best, and it is clear that the regulators and government are now looking closely at this, particularly since the Chancellor’s Autumn Statement in November.
It has also fallen behind in increasing contributions to pensions arrangements as successive governments have failed to further raise mandatory contributions through AE. Worse, in some cases employers are dropping higher-than-minimum contributions to the minimum legal levels.
The recent Mansion House speech and Autumn Statement highlighted that small pot consolidation (or sweeping and stapling) could be coming to the UK. How did this benefit savers in Australia and how could it work in the UK?
Deduplication, streamlining and competition have forced focus on experience, fees and returns in order to retain and grow business. At the end of the day, the saver benefits on all fronts.
Having appropriate technology solutions in place has allowed for transparency and action in a manner that reduces cost to serve and drives trust and engagement with the system.
And, with the introduction of low balance fee rebates in Australia, small pots often became more of a liability for funds than an asset.
The UK should look carefully at what has worked in overseas markets, particularly Australia, and start to legislate for an overhaul of the UK system in a clear and managed way over the next 10 years. This means linked-up systems, better consumer choice, and clear and transparent fees. In the UK, the underperformers need to improve and put the needs of the saver front and centre.
How does automation benefit Australia’s ‘super’ system? How can this be replicated in the UK?
There has been heavy regulation, investment, and a shift of focus to member experience. Strict legislative processing times are enforced for the exchange of data and funding between parties. This is known as ‘SuperStream’.
Outside of transactions captured by SuperStream, there is still variation and legacy processes in some pockets of the industry, creating further opportunity. Funds, however, can see first hand the cost savings and efficiencies achieved from investment in standardisation and automation.
Building on the standardisation of core processes and digitisation of the industry required for Dashboards should be firmly on the UK’s radar. Investment in common processing, a ‘clearing house’ infrastructure, and real-time information to/from HMRC and DWP, will greatly benefit the industry, speed up processing, and reduce errors and fraud. Real-time contribution processing and efficient and scam-proof transfers must be high on the list.
How is the UK pensions space embracing digital transformation?
We are seeing improved access through apps and digital sites, however, there is still a large amount of poor design, inaccessible language, legacy technology, and limited functionality. Some of this is explained through legacy DB schemes aged infrastructure. However, there are many large schemes, administrators, and providers whose core technology is outdated and creaking, and this restricts the ability for real-time transactions and interactions with platform administration software.
It also limits the ability for providers to offer new and innovative products, such as digital advice or educational tools, which are really popular in countries like Australia and greatly help boost understanding and engagement. There is progress being made, but it is fragmented and painfully slow; I’m hoping to see this accelerate following the government’s recently announced reforms.
What do you hope the UK would learn from Australia’s pensions market?
Large-scale digital transformation is not only possible but essential to future-proof and support members, and to ensure providers are still around in 10 years’ time. Providers ultimately need to invest to move the industry forward.
There is a lot to learn – not only where things have gone right, but where things haven’t quite worked out as expected. The Autumn Statement 2023 has heralded a consultation on ’pot for life’ and the government commitment reaffirmed for Pensions Dashboards and Small Pots Default Consolidators. This will require the UK to tackle all the issues highlighted to make a pensions ecosystem fit for the future – this must be done in a coherent way, and include future-looking tech providers as well as existing industry to ensure we build the right future.
