Are DC pensions that much rosier in Australia and the US?

Australia has cracked the coverage problem for the employed by making enrolment mandatory. The UK is almost there with auto-enrolment, but we could certainly take heed of the Australian model if we’re to ensure we capture everyone we should. How to service the self-employed and the low paid is something we, the US and Australia still need to address.

In the US, enrolment is not compulsory and coverage is only at around 50%. This is something they want to improve and it’s clear they're very interested in UK developments. The master trust model is certainly catching their eye. NEST was the most common thing I was asked about. Offering the opportunity to enroll employees into state run multiple employer plans (MEPs) – similarly structured to UK master trusts – is something a few state governors have implemented and many more are now considering.

Australia puts the onus on employers and currently mandates them to pay contributions of at least 9.5%, increasing to 12% from 2025. Generous, but perhaps not as generous as it first seems as the contributions also cover the cost of life assurance.

The US tackles the problem from a different angle. There is no compulsory minimum contribution, but a large proportion of employers who offer plan membership do so via a ‘save more tomorrow’ model (auto-escalation). Taking advantage of the pension industry’s most effective tool – inertia – and increasing contributions automatically by even a little each year can significantly increase pot sizes at retirement. This is something that I passionately believe employers in the UK should take more advantage of!

In terms of investment strategies, this is where Australia often holds its head up high. Performance has been good and investment in infrastructure is often cited as the reason. Infrastructure is being considered more and more in the UK, but often the argument against it is illiquidity. It's something that's not an issue for the largest superannuation provider in Australia, who told me "when you have $6bn of net annual cashflow, liquidity is not a problem."

Scale is clearly a key characteristic of a successful pension system (a theme regularly picked up by our policy makers and regulators!) and is a clear requirement for illiquid investments. However, with over $20trn of assets in the US DC market and scale already being achieved, their use of illiquid investment is surprisingly absent. This is not because of any lack of appetite for doing so. Rather it is the fear of litigation that is stifling investment innovation in the US.  

This fear is palpable. Class action against plans and plan sponsors is common. The reason for this is the argument that high fees have eroded pension savings. Fund managers are under constant pressure to keep fees low, and arguably too low to enable anything but 'vanilla' investment strategies.

In all three countries, I argue that there is no such thing as a DC pension system – just a long-term saving system. We help people build ‘pots,' but we’ve lost the notion of helping people build ‘pots to pay.'

That said, the US is at least ahead in its thinking. Most of their major fund managers have designed investment solutions to help people manage income in retirement. As soon as soon as proposed pension legislation in the Secure Act is passed, they expect default funds incorporating deferred annuities or annuity backed securities during the decumulation phase will become widespread.

In the UK and Australia however…tumbleweed.

UK providers are very keen to explain how they can support people up to retirement but generally, when asked how they help people after retirement, often answer “we don’t."  How is this right when people making regular cash and/or income withdrawals are still members of the pension plan?  

That position is similar in Australia. During my trips, I unexpectedly saw no innovation in the at-retirement space. When asking providers why, the answer I sometimes received was "because there’s no reward for innovation." Their mindset is "why should we support people in taking money away from us?"  

In Australia, people are generally not drawing enough in retirement. They are fearful of exhausting their pots too soon. Rather than helping to solve this, it seems most providers are focusing on retaining members’ assets for as long as possible.  

In the global DC pension industry, we need to stop our fixation on accumulation. We need to do more to help people to, and through, retirement. I remember a time when pension meant ‘deferred earnings,' not simply ‘long-term savings.' We need to go back to that notion if we are to truly help people and not just the organisations keeping hold of people’s hard-earned money.