Retirement solutions: lessons from Australia

Mike Ambery: Hello and welcome to the latest episode of Thinking Forward with myself Mike Ambery, where we explore the trends and developments affecting the UK pensions industry. I'm lucky enough to be here today with Paul Leandro, Partner from Barnett Waddingham, John Greenwood, Editor of Corporate Adviser. And the person that lets the cat out of the bag. Senior Investment Proposition Manager Femi Adigun from Standard Life. 

We're here to talk things. Well, all things Australia, which some of you may know is a mature market. And we try to look at and learn from within the UK. Over a series of episodes, we'll split up the topics today's episode, we're going to look at retirement solutions. So it's a pleasure to be joined by, each of you today. Now, before we come on to the focus of the podcast, which is retirement solutions, I'd like to get your related views over adequacy, something which I know you've all spoken about previously. It’s because it’s meaningful, to have retirement when you've got adequacy. 

So as we know, in Australia, they have a higher default contribution rates than here in the UK. Firstly, how much of a difference does that make? And on a related note, should we change auto enrolment? Other things come into play of what about housing, what about other savings and what else should we do differently in the UK? So I’ll start on adequacy to begin with if that's okay. And I'll come to Paul and ask you. With regard to adequacy in auto enrolment, do we need to do something? 

Paul Leandro: Yes, in a nutshell. So what I think Australia got right is that they mandated a 12% contribution from day one. Not in terms of the level of contributions going in from day one, but they mandated that was a target that they were going to get to. Now it took them longer or is taking them longer to get there. But they will get there. 

Our mistake was setting the minimum contribution rate to 8%. I know that it was intended for that to be reviewed. But yeah, we set the stall too low. So now we're in a position where, you know auto enrolment, great coverage. Great. But people are not paying enough into their pension arrangements. And that does need to change. 

Mike Ambery: John? 

John Greenwood: Yeah. I mean, I think it is going to have to go up the simple realities of longevity mean that people are just not going to have enough under DC pots that they've been massively underfunded relative to DB and people are, in a dream world if they think they're going to get anywhere near the retirement income from them, that people have enjoyed, previous generations have enjoyed. The question is, who pays for it? 

And I think, yeah, to your point, 12%. Pretty sure that's all employer contribution in Australia whereas we’ve got 3% in the UK. So that shows the gulf in the difference in terms of what the governments were prepared to put on to employers. So my sense is that any increase in their contributions is going to be on employers, employers are used to shrugging their shoulders, pulling their hair out and then getting on with things as long as it's done far enough into the future. 

I think there'll be a groundswell of, resistance from some quarters if it was on peoples’ own contributions going up, because there's a lot of people on low incomes, are already got a very high replacement rate with state pension. And they're going to be, they're going to be relatively well-off compared to where they were previously. They've got pressing housing needs now. They've got pressing, you know, to putting the electricity on the gas and feeding their children. So taking that money away from them now, is something we need to think about hard.  

Mike Ambery: Absolutely. Femi, where do you stand on this of, increasing the burden on either employee or employer, but needing to create a better pot?

Femi Adigun: So I think it comes back to that question of adequacy. You know, I think we've had a few phrases used in our industry member outcomes, adequacy. What does it all mean? I kind of like to split up adequacy into, you know, pension pot accumulation, that’s probably one part. And then the other part is retirement income adequacy. Actually, can they live a decent standard of living in retirement? 

I think central to that though, probably to answer your question, we need to get pensions on that financial inclusion financial resilience agenda of government. And I think it's been largely missed from that debate. And so as an industry, we can absolutely, we know pot sizes need to be bigger for someone to have a decent, standard of living at retirement. 

But they are, you know, dealing with a range of other factors, whether it be housing, like someone in my current situation, you know, I'm dealing with higher house prices. I guess then my then previous generations. At the same time, I know many individuals that are dealing or managing that, and I think then that the third one is actually your who's going to pay that, extra 4% that we're asking for, if it's the employer is that going to slow down wage growth, is there going to be more, issues? And so on. But I think we need to have a more of a collective approach to this as well. 

John Greenwood: And if I could come in there Femi, yeah. I really think your perspective there I get what you're saying about the housing costs in particular and also the 4% slowing down the wage growth because it will do that. So it's almost always something we've got to do, but we've also got to think of it in the holistic. 

So it's not just a pension review, and we don't need another pension review. We need a complete financial, resilience and wellbeing review. It's fine. We've got a brilliant, behavioural journey to get people into these products that they'll only see when they're 65, 66, 67. But at the moment, they've got all sorts of bear traps that they can fall into in the preceding 45 years. And we haven't created brilliant choice architecture for the rest of their life. So I think it needs to be seen in the whole. And housing, is definitely a massive part of that. 

Mike Ambery: If we move on from adequacy because we do know there are substantial pots being built up in the UK. In Australia, they introduced in, July 2022, the retirement income covenant, which pretty much required trustees to formulate and deliver a retirement income strategy which would be publicly available that strategy must outline from the trustees, how to achieve a balance between expected retirement income, sustainability and stability of their expected retirement income, and having flexible access to those funds during retirement In Australia, It's been criticised as has actually anything been done by providers. That's my headline, but I'm going to turn to Paul and say, do you think there is any real difference yet in Australia?  

Paul Leandro: Well, I think it's worth saying why was the retirement income covenant introduced? So in Australia, general thought is that people are not drawing enough in retirement. So they've had the full freedoms effectively forever. And people are not drawing enough. There’s a perverse race of trying to be the richest person in the graveyard that frustrates the regulator, because people are not using their supers as pensions, you know, as funding pension income during retirement. 

So they, the regulator stepped in, introduced the retirement income covenant. When I was there about 18 months ago, it had hardly any impact at all. So effectively the, the mandating on the funds was to publish what their retirement strategy is that was interpreted in different ways by different funds. So that needed to be. Yeah, they need to publish their retirement strategy on their website. It was a range of responses from one pages to quite comprehensive, strategies, but really just reiterating what they are already doing, not effecting any change. Now, the cynic in me, suspects that there hasn't really been any change because the status quo supports the funds, because assets are remaining in the funds for longer. 

The regulator continues to be frustrated, and I think it released its second iteration of retirement income covenant. It's about eight months ago, something like that. Really encouraging funds to do more, to innovate better educate, better engage, and to think of what better products should be there to cover those key risks that you outlined.  

Mike Ambery: Thank you. John, I'm going to ask you from your awareness of Australia, has there been enough to put in those decumulation options? 

Paul Leandro: Yeah, again, I was there five months ago. And the sense I got anecdotally was that there hasn’t been much change either. And the conversations I had were sort of like talking about annuities, which we all know about, we've been through and possibly moving back towards. So I didn't get any when I'd say the conversation, the UK feels like it's covering at least as much ground, let's say, as over there. 

This idea of maybe flex, then fix, you know, working. You know, they say defaulting into some sort of annuities. I spoke to somebody the other day who was talking about maybe a requirement to secure a certain level of income. Before being allowed to use freedoms, which was considered like where we were going to go from compulsory annuitization. Annuitisation to, a few years back before George Osborne blew the doors off, so to speak. 

So, I think, yeah, it's, as you say, the rich smell in the graveyard is still a concern there. And then as you say, there is no, someone said to me once, a DC pension provider said there's no business model for, someone getting older and older and a shrinking pot for drawdown because it just, your ability to pay for what you're getting is shrinking year on year out. So, I think it's an area that they're still crying out for innovation for. And, my sense is that they're looking to places like the UK for inspiration. 

Mike Ambery: Absolutely agree with that. Femi, I'm going to just turn to you and say it’s a global problem at the point of retirement. Range of solutions. Engagement with members seems to be the key issues. I don't know whether you have sort of feelings of whether the UK, as John said there is, starting to advance the market and people are starting to look at the UK with its range of annuity products, smooth funds, different drawdown products that are available, as the way forward and whether Australia being mandated is something what the UK is actually doing naturally and looking at. 

Femi Adigun: Yeah, I would definitely say we've been we've definitely been on a journey. And obviously we do cite the Australian market as being quite mature. I think when it comes to a retirement income strategy, options offered to members and customers and savers, you know, it’s still in its infancy. I think we've seen a few developments, happen, on our side of the pond, over the past few years. So, you know, investment pathways was one we saw that needed to be implemented for contract based schemes. 

A few trust based schemes wanted to, offer those types of solutions as well. I think the key thing here and it comes back, it goes to the conversation about advice and guidance. Like actually what how do we empower, for example, trustees, to feel comfortable that they can provide targeted support? I think that's something that would be welcomed in the industry. Which is, please provide a clearer definition of advice and guidance.   

Mike Ambery: I think you make a really good point. And John, Paul, I'll come to John first. In terms of that advice, guidance, is it just too difficult for individuals, whether they're Australian or English or whatever nationality, to select and to make a decision? Would it be better to be guided rather than advised? 

John Greenwood: It's very difficult being guided, because you don't know if you've got the whole, of the picture on there, you know, people have got a lot of assets all over the place. 

People have got pensions all over the place. It's going to be really hard to give anybody a sort of guided solution with that, without knowing what they've got. And, if you've got at the moment, the situation we have is we've got like maybe people with 10 pension pots, each pot is maybe small and therefore assuming that the person hasn't got much and therefore suggesting, well, for someone with a pot this size, you do x, y, z. 

There's all of their ISA stuff, their property that they own. Complexity of their life, their spouses or partners income and their needs. So it's hard to get away from thinking that you think some form of low cost digital advice, has to be the ultimate goal. And whether AI can help us get to that, is a way forward. It's a tricky one, guidance, because obviously there's definitely the case that employers can't say everything that they want to say or they feel they can't. Maybe they can say more than they feel they can at the moment. But I'm still cautious about guidance because you can get a lot of things wrong. Also, I'll just caveat what I said earlier. There's probably Australians listening, going no, we're not looking that much at the UK, what's going on here, we're doing fine with that. Because we haven't made that much progress ourselves here to be frank. You know, I don't think we should be slapping ourselves on the back. We’ve got a long way to go over here, not least in terms of getting basic levels of functionality across providers, particularly in the trust based world. 

They like their contract based providers. And the life offices have all got the full range. You know, some providers on the trust side, you can't even do, use the full range of options that are out there. And, and that's down to the complexity of our tax system and the way we draw income and the difference between us plus and tax free cash. And so there's all sorts of terrible outcomes happening at retirement, wiping out lots of value, which to be honest, in the Australian scheme, I think it's probably simpler. 

Femi Adigun: I was just going to add to that. It's interesting because we've spoken about in the past, when you've had industry chats about, you know, stapling and Australian, what happens in Australia.

I'm wondering if actually that's, put them ahead of the game when it comes to being able to deliver a retirement income solution because you're 100% right, we’ll want to offer some sort of targeted, messaging to that customer. But can you imagine if we're sending different messages across providers based on what information we held and there's different pot sizes It's just going to be manic, isn't it? 

Paul Leandro: Yeah. So we had the same thought in 2014 when the full freedoms were introduced over here, we thought, and Australia being held up as the panacea.

So we thought, crikey, they must have cracked it. So we went over in 2014 to understand what they would do in innovation in relation to innovation at retirement. And we didn't see anything at all. And then that leads onto, you know, the retirement income covenant. So logically, Femi, you know, arguably you would expect to see more. But the mindset in Australia is that someone’s superannuation pot is theirs. And it's not necessarily something to generate an income in retirement. You just need to have a look at the take up of annuities over there. 

Now there has been some take up, and a small take up of a very large market does still create a large number, you know, in relatives, relatively speaking, there is a lot of money in annuities in Australia. But relative to, you know, the rest of it, the default position is drawdown. And that's what people do. There has been some innovation of product. A couple of longevity pulling products have come to market, but not really being taken up. Now, they're not really being actively marketed, by the superannuation funds. But people are not really buying them because they don't really understand them. And again, it's that mindset, I'm passing my money over here to generate an income and taking it away from me. That doesn't seem to make sense. Now. I would argue that in the UK it hasn't happened yet.  So I think there does need to be more encouragement, pressure from policymakers, to foresee industry to better innovate in the retirement space. 

There is some commercial pressure which is causing providers to bring new products and new innovations to market. You know, we can, you know, see in high value assets, move into the retail space at retirement, providers want to retain those assets for longer, obviously. But until such time as there is a real shove from the regulators, from the DWP, I can't see there being much change because the fixation is still on accumulation, the fixation is still on consolidation and retirement is on the priority list, but further down. So we're going to be seeing some innovation later on.   

Mike Ambery: That makes absolutely sense. I'll give a final comment for John. You've mentioned AI, you've mentioned or we haven't mentioned yet. We'll probably talk about dashboards. Do we think this innovation will come?  We see products being available it’s then the engagement with the end consumer.

John Greenwood: Well, I mean, I hope we will, we obviously need something and yeah, obviously the dashboard will be a key part of that. And, it's hard to know whether it's going to be big bang or damp squib in terms of, money flowing around the market. Some providers say that they're already seeing transfers flying about with a few clicks of an app. Others seem to say it's not quite so fluid. So to that sort of, have we got the plumbing in place for something? We haven’t got something, plumbing in place for something like the Australian model for contributions. 

But whether we've got the plumbing in place for transfers and will accelerate, with that consolidation, or will people keep a basket of, different providers going, just to sort of spread all of their assets? That would be in some cases more costly. So probably not a good idea. So visibility should improve. Still. You know, we still needs something that's going to help people accrue, on an accrual basis to get more engagement so that they can get more of their assets onto whatever tool is going to be used. 

Because that's been the problem with the current model there, they're getting people to actually use the things. Hopefully that will improve and people are gonna have to sit down at retirement and make the decisions. They’ll also want to speak to somebody as well. So it's a hybrid bionic model is probably going to rule the roost.  

Mike Ambery: Absolutely, Paul? 

Paul Leandro: Yeah. I just want to pick up on that point of, enabling people to do stuff. Because where we're talking about innovation at retirement it’s not just about product. Yes, there will be more products coming to market, but if people are not engaged with them, they don't understand them, they're not going to buy them. So investment needs to happen in, you know, the term choice architecture is used. But you know, effectively systems and frameworks that better engage and educate people. So that they can make choices at retirement and during retirement. 

You know, people change their minds, that have changed the circumstances. They need to be engaged throughout that period so that they can make informed choices, whether that's purely through a digital solution, whether it's bionic, whether it's signposting towards guidance. We have to do better. I'm of the view that actually a digital solution can go quite far. And we're moving to an environment where digital solutions well, digital systems know a lot about individuals. 

You know, the advancements around open banking, that you know, someone the system will get to know somebody during the accumulation phase, know their retirement habits. Sorry, their income habits, their spending habits, using that information to inform how they could continue that quality of life or what they could actually do based on the level of assets that they've got and level of debt they've got, you can see that happening, and you can see that being powered through AI, through digital solutions.  

Mike Ambery: I want to say a big thank you to Paul, to John, to Femi. Thanks for joining us today for this episode of Thinking Forward. As always, let us know if there's any other topics you would like us to cover in future episodes, and you can catch up on previous episodes on our website. Just search Standard Life Thinking Forward.