As Australia considers limiting its pension freedoms, the UK may be reforming too fast to learn from its cousin’s mistakes
When it comes to pensions regulation, it is fair to say that we have been emulating Australia’s more sophisticated system for a while now.
Much was made of the pensions revolution that was promised in this year’s Budget. UK scheme members now have unprecedented control over their savings, including taking pensions as cash and access to flexible drawdown arrangements.
What did come as a surprise, however, was the news that just as the UK heralded the end of compulsory annuitisation, Australia seemed to start looking at something very like it.
It seems unlikely that we will see full compulsory annuitisation in Australia, not least because it is so unpopular with savers.
What still remains clear, however, is that too much flexibility has left the country with a real problem. Part of the interim report of the Murray Review into the country’s financial system, noted that “around one-quarter of people with a superannuation balance at age 55 have depleted their balance by age 70”.
“It seems unlikely that we will see full compulsory annuitisation in Australia”
As David Knox, senior partner at Mercer Australia put it, at the UK launch of the Melbourne Mercer Global Pension Index 2014, “the danger with the DC system is that people see it as purely wealth accumulation”, as opposed to an income for retirement.
Knox argued that, to a certain extent, flexibility is a good thing, but what is crucial is to look at income streams, whether in the form of annuities or not. He specifically uses ‘income streams’, rather than annuities, to cover a broader church of innovations that will help Australia safeguard against issues such as longevity risk and market volatility.
Australia ranks second in the Mercer Global Pensions Index, only a short way behind leaders Denmark, but a long way ahead of the UK which lands in 9th place.
Interestingly, Mercer recommended that for Australia to improve its score, it should introduce “a requirement that part of the retirement benefit must be taken as an income stream” instead of it all being available to take at once. Even more damningly, Mercer anticipates that the new freedoms will negatively impact the UK’s score.
“What is emerging from the Australian market is that too much freedom can also be a bad thing”
So Australia may not be going down the annuitisation route as such, but making it compulsory for retirees to take some of their retirement benefit as a regular income stream instead of a lump sum is crucial for one of the best pensions systems in the world to improve.
So what can we learn from this? The annuity market in the UK was clearly flawed, but what is emerging from the Australian market is that too much freedom can also be a bad thing. At a bare minimum it seems some sort of hybrid model is needed.
Pensions regulation in the UK is moving at a fast pace, with more changes coming through than the average person can keep up with. Perhaps it’s time for us to slow down and learn lessons from more sophisticated markets. That way, instead of following blindly in their footsteps, we can come up with a sustainable pensions system that works.