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Can the UK learn from Australia’s pension savers?


With retirement edging closer, 53-year-old Christine St Anne, from Sydney, Australia, is keeping a closer check on her “superannuation” pot.

But unlike many workers around the world, St Anne feels confident about her financial future, being a member of one of the world’s best-performing pension funds.

St Anne, a financial services sector worker, says: “Of course there’s been ups and downs over the years but it has been usually above the benchmark. We have all been taught here to take a long-term view. On the whole I am very happy with the performance.”

Over the past decade, St Anne’s balanced superannuation fund — AustralianSuper — which has a diverse range of assets from global shares to private equity and even a large stake in London’s King’s Cross estate — has delivered average annual returns — after charges — of 8.6 per cent.

That’s not unusual in Australia: in particular, high-growth superannuation funds used by the majority of younger savers — as opposed to the balanced funds often held by older savers like St Anne — have typically delivered 8.8 per cent annualised returns over the past decade. By comparison, returns for equity-rich funds in the UK for the same cohort of savers average around 7.6 per cent annually over the past 10 years, according to calculations by Corporate Adviser magazine.

The 1.2 percentage point gap might not sound like a lot, but over 30 years it mounts up. An Australian pension would be nearly one-third bigger than a British pot.

Headshot of Christine St Anne
Christine St Anne from Sydney is looking forward to a comfortable retirement

Moreover, Australian funds have achieved their returns with a strong commitment to investing in private assets, including infrastructure and private equity — precisely the aim of the UK government under Prime Minister Rishi Sunak.

“In terms of investment strategies, this is where Australia often holds its head up high,” Barnett Waddingham, a UK-based consultancy, writes in a recent briefing. “Performance has been good and investment in infrastructure is often cited as the reason.”

As British pension savers look to squeeze better returns from their pots, could Australia offer the UK any lessons in boosting investment performance?

At the same time, could it suggest ways for UK pension funds to invest more in Britain, especially in non-traditional investments that are not traded on public markets? Those might include early-stage companies and infrastructure schemes. FT Money takes a deep dive down under.

The ‘super’ size advantage

First, Australian pension schemes are big defined contribution (DC) funds, with all the extra investment muscle and cost efficiencies that brings. The regulator has pushed for consolidation, cutting fund numbers to 140 from around 230 a decade ago.

The top five “super funds”, as they are known, hold nearly a third of total assets — A$3.5tn across 24mn accounts at the end of June this year according to the Association of Superannuation Funds of Australia, the industry body. About a fifth of assets across the sector are held in private markets, including unlisted equity, infrastructure and property.

In the UK, the industry is less centralised. Thirty-six “master trusts”, the largest workplace DC pension schemes, held three-quarters of the DC pension sector’s £143bn total assets, or £105bn, as of June, according to The Pensions Regulator. Nest is the UK’s largest automatic enrolment workplace DC pension fund, with 4.8mn members and £30bn under management.

DC schemes account for a much smaller portion of overall pension assets in the UK than in Australia. This is because UK pension assets have been historically dominated by defined benefit (DB) schemes and public sector pensions. Australian employers have been required since 1993 to save into super funds on behalf of employees, resulting in much bigger asset pools.

At the end of 2022 there were around 27,000 UK DC pension plans, with 85 per cent reporting fewer than 12 members. UK pension plans’ investment remains heavily focused on listed equities and bonds. Less than 5 per cent of investments are allocated to private markets, mostly in infrastructure and real estate, according to data from the Pensions Policy Institute (PPI).

In one respect, Australian and UK funds are similar — both invest heavily abroad: the PPI says British funds have about 55 per cent of overall assets in developed market equities, with just 6 per cent in the UK. Many of the biggest funds in Australia have nearly half of their portfolio — including listed equities and private assets — in international areas.

Although direct performance comparisons between pension funds in different countries are tricky, Australian savers appear to be enjoying better returns after fees and charges (see table).

The advantage is clear in growth-focused funds, which are rich in equities and alternative investments, and targeted at younger savers, with perhaps 30 years before they draw their pensions. Many UK workplace pensions shift older savers towards less risky assets, typically with a higher proportion of bonds.

The differences are smaller when funds have a lower proportion of high-growth assets, typically held by those closer to pension age. For example, for a balanced fund over 10 years, the super fund median result is 6 per cent, according to the SuperGuide. Over the same period, the most popular super fund — AustralianSuper — returned 8.6 per cent.

Pensions compact

It’s certainly a good time to take stock. In July, UK chancellor Jeremy Hunt announced a compact with nine of the UK’s largest defined contribution style plans to boost their investment in unlisted assets, such as private equity, start-ups and infrastructure.

They represent about two-thirds of the UK’s entire DC workplace market. The compact, which is voluntary, sets an objective for these funds that they should allocate at least 5 per cent of their default funds to unlisted equities by 2030.

The Labour party this week brought out its own plans to drive more pensions capital towards British businesses, announcing a review of the pension system.

The government, along with many in the City, is promoting its pensions compact as a win-win: in the long term, pension savers will receive a better return, while that pension cash will be deployed in the national interest, backing vital investment and keeping start-up companies in Britain. 

But far from being reassured by Hunt’s words, many pension experts feel uneasy over the push to steer savers’ cash into risky, costlier and less transparent assets.

Bar chart of Split of defined benefits and defined contribution assets in OECD countries, 2020 (%) showing Most pension assets in Australia are DC

Adequacy challenge

Few would dispute the need for Britain to act on its retirement savings crisis. Almost two in five UK workers were under-saving for retirement, according to government analysis published earlier this year. 

Critics contend that one reason for the shortfall is the way DC funds allocate their cash. 

Speaking at a conference this year, Andrew Brown, institutional business director at asset manager Columbia Threadneedle, contrasted the cautious approach of DC funds with the more diversified approach of DB investors. He said: “What we find in DC is that decision makers are less inclined to cast the net [widely] . . . in terms of asset classes. Investments can and should work harder for hard-working members.”

The bulk of assets in UK DC plans — around 75 per cent — are invested in mainstream listed equities, according to the Pensions and Lifetime Savings Association, an industry body for the workplace pension sector. A further 16 per cent are in lower-risk bonds.

Only about 3 per cent are in so-called alternative investments, such as private equity and infrastructure — a fraction of the Australian figure. “Comparable Australian schemes invest 10 times more in private markets than UK schemes, reaping the rewards that UK savers are missing out on,” notes the UK Treasury.

Value and price

There is a price for the Australian pursuit of alternative investments — Australian workers typically pay higher pension investment fees than Brits. 

A saver in the largest UK pension funds can expect annual fees of about 0.4 to 0.5 per cent. By comparison, fees on an average “superannuation” default investment option range from 0.91 to 1.21 per cent of account balances, according to Canstar, an Australian financial website. 

However, Hymans Robertson, a UK firm of pension consultants, believes British retirement savers could get better returns if they paid a little more. “We need to stop the race to the bottom on charges,” it argues. “There’s a compelling case for bringing alternative asset classes, such as illiquid investments and private equity, into DC default investment strategies.”

Government analysis produced alongside the compact sought to showcase the potential benefits of private market investments. It estimated that, after 30 years of saving, the gross pension pot of an average earner would be 5 per cent bigger if it included a private equity allocation.

A big reason for the UK’s focus on low fees is an annual 0.75 per cent cap on annual management fees for investment products used by auto-enrolled workers, intended to protect modest pension savings.

It has worked, in the sense that British retirement savers have the lowest charges in the developed world. But it has precluded investment in non-traditional areas which can deliver potentially higher returns.

To help overcome this, the UK government in April this year removed performance fees — commonly levied by private equity managers — from fee-cap calculations.

Under this structure, a manager receives an annual fee and a bonus for any performance above a hurdle rate. In the UK, ongoing fees of 2 per cent plus 20 per cent for outperformance — the so-called “two and 20” — are the norm. With performance fees at this level, some savers could be left worse off, according to government analysis.

For Mick McAteer, co-director of the Financial Inclusion Centre and a former board member of the Financial Conduct Authority, this is a problem. “Private equity funds are opaque, they are expensive and performance cannot be guaranteed,” he says. If they underperform, savers are “still paying high annual management charges”.

Moreover, the old risk with unquoted investments remains — they can be difficult to sell in volatile markets. “While public equities offer daily price transparency, the valuations of private assets are not readily available,” says Philipp Sfeir at NeoXam, a global financial software company.

Focus on customers

A feature of the Australian system is the pooling of investment management resources. “More than 20 years ago, Australian superannuation funds joined forces to create an investment vehicle that uses scale and expertise to access more complex global private markets,” says Gregg McClymont, a former UK shadow pensions minister and now a spokesperson in Europe for IFM Investors.

IFM, which invests in private markets on behalf of 17 Australian pension funds, has more than £111bn under management. “The UK has no such investment vehicle — but it needs one,” says McClymont. 

A key feature of the Australian pension market is that individuals choose their workplace super fund. In the UK, the employer makes that decision.  

“This fixates [Australian] providers on investment performance league tables, as these are a key element that drives individuals to enrol or switch into their funds, or out of them,” says Barnett Waddingham.

The regulator has also put in place benchmarks, or “measures”, to protect members. Barnett Waddingham says that if an Australian fund underperforms a measure in a single year, the provider must inform members in writing and note they could consider moving their assets to a better performing fund. If the fund underperforms for a second year, “it is essentially forced to merge with another provider”.

Australian super fund trustees face a strict duty to act in members’ best “financial” interests. For UK trustees it is usually “best interests”, without the laser-like focus on “financial”.

Improving performance will require investing in management. The Pensions Regulator (TPR) in the UK wants to see more funds consolidated after its recent analysis showed most small schemes were not delivering value for money for members.

Nausicaa Delfas, TPR chief executive, tells the FT: “We will be looking to help move the market to consolidate and to have a professional trustee on every board.”

The Australian model may have its flaws, but UK policymakers would be wise to consider its successes when designing homegrown reforms.

Private market risks

The British government initiative to encourage pension funds to invest in private markets comes amid declining returns on some illiquid assets, as higher borrowing costs squeeze profits at operating companies.

The premium for investing in more complex, costly and illiquid private markets, compared with more transparent and easily tradeable stock markets, needs to be higher to justify the extra risk.

Australia’s experience of consolidation means many super funds are now big enough to make significant allocations to private market investments without jeopardising liquidity, such as through forced asset sales.

AustralianSuper, the biggest of the superannuation funds with more than A$300bn under management, uses its scale to secure good deals.

“We invest in private equity through a small number of close ‘general partner’ relationships,” says Damian Moloney, deputy chief investment officer. “There are efficiencies for us in deploying more selectively at scale with large ticket sizes and that then comes with rights to invest alongside private equity managers in transactions.”

But even so, Moloney says that “given the market dynamics”, the fund has slowed the pace of deployments to private equity. It accounted for just 4 per cent of investments in its most popular balanced fund this year — within a permitted range of 0-15 per cent.

The Australian system is not without its faults. The superannuation sector regulator recently found defects in valuation practices and ordered improvements.

The EDHEC Infrastructure and Private Assets Institute, part of the EDHEC Business School in Singapore, said the UK regulator needed to follow suit and do more on murky private equity valuations, in a recent submission to a UK government consultation on pensions.

For Gregg McClymont of IFM Investors, good financial returns are paramount, whatever the aims of political policymakers. He says: “Whatever government is in power, it is essential that the approach to investing is first and foremost right for members.”

Tom Selby, head of retirement policy with AJ Bell, an investment platform, agrees the risks of private market assets should not be underplayed and should be carefully explained to savers.

“While ministers wanting to corral pension money into the UK economy is understandable, there is a danger hard-working savers will simply be forgotten about in all of this,” he says.



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