‘Freedom and choice’ is here to stay, but we know from the Australian experience that it can cause problems further down the line.
What can trustees do to safeguard members’ welfare and ensure the long-term sustainability of UK pensions? That was the theme of a panel session at Engaged Investor’s recent Professional Trustee Summit.
Two expert panellists, Andrew Block, partner at Mayer Brown, and Sandra Rockett, director of business development at Irish Life Investment Managers discussed their experiences of the Hong Kong, Singapore and Ireland pensions systems, and how the UK could learn from them.
Hong Kong and Singapore
Block explained that in Hong Kong and Singapore, paying into a DC scheme is part of their culture. This is something that UK auto-enrolment is trying to achieve, but he argued that we still have a long way to go.
He explained that despite higher engagement, the models in both Hong Kong and Singapore showed the limits of “pure” DC, and the difficulties the UK may face into as it moves in that direction.
Both countries have pensions systems similar to auto-enrolment, with employees in Hong Kong receiving a very minimal state pension, and contributing to a mandatory provident fund along with some employer contribution. In Singapore, there is no basic state pension, but all employees contribute to a central provident fund.
Because individual DC pensions do not involve risk sharing, retirement outcomes can be extremely variable from member to member. In Singapore this has created pressure on the pensions system. Trying to rectify a similar problem, the Hong Kong government has tried introducing a basic state pension.
Block pointed out that in Hong Kong, the state pension is designed to relieve absolute poverty rather than provide a wealthier retirement. This prompts a philsophical question about the UK state pension: is the aim is to remove pensioners from the risk of poverty and relying heavily on DC provision, or is it to provide a comfortable retirement?
Sandra Rockett described the pension model in Ireland, giving her top three learnings that UK pension schemes could take from the Irish pension system experience:
1) Evolution of the default strategy
Around 80% of members in Ireland choose the default option for both investment and contribution rate. Rockett questioned whether this was due to a lack of member decision making, or whether the default option was in fact the most suitable. This reliance on defaults meant that contribution rates needed to be examined to ensure members would save enough to provide an adequate retirement income. As a result, an auto-increasing default rate will now be introduced.
2) Simplification of investment choice
Ireland has moved away from branded fund options, towards a system of white labelling funds, to encourage members to opt for a fund based on its suitability or alignment with their objectives, rather than going for a recognised brand name. With names such as ‘annuity target fund’ and ‘growth fund’, trustees in Ireland are now focusing on targeted outcomes.
Engagement is still the single most unaddressed issue in Ireland, explained Rockett, which has consequences on contribution levels and retirement incomes in the longer term. Traditional communication methods such as paper statements are no longer effective for engaging with a younger demographic, so trustees should look at new tools such as social media, and smart phone apps.
Although Ireland are clearly ahead with experience, Rockett did say that Ireland were drawing on the UK’s experience and considering introducing a master trust similar to NEST.