Following the Chancellor\u2019s recent announcement that the new Labour Government would actively look at pension market reform, Policy Exchange has published a new paper setting out what might be learnt from the Australia\u2019s superannuation model.<\/p>\n
Growing Pension Capital \u2013 co-authored by Chris Mahon and Policy Exchange\u2019s Head of Political Economy James Vitali\u00a0 \u2013 argues that the UK regulatory framework for pensions was designed for an era of defined benefit schemes with broadly fixed outcomes.<\/p>\n
Existing regulatory approaches have prioritised concepts such as safety and value for money that were crucial for legacy defined benefit schemes, but the same approach gives little emphasis on the outcomes that matter more for defined contribution members.<\/p>\n
This framework is proving increasingly outdated, as defined contribution schemes have now become the dominant vehicles for the current generation of pension savers.<\/p>\n
Well intentioned concepts such as value for money perhaps still made sense in 2012 when autoenrollment was introduced and pension costs were higher. Now, having successfully reduced costs, these same concepts are allowing a system to develop where certain risk profiles are too low, private market exposure are too low, performance is too low and there are low levels of contestability.<\/p>\n
While the recent King\u2019s Speech contains certain recommendations to make some limited changes to the value for money framework, the current proposals do not go far enough to embrace a focus on outcomes.<\/p>\n
The report highlights the benefits that could come from adopting an Australian approach. The regulations behind their famous superannuation system have a more proportionate approach to risk, better entrench competition, and deliver better overall outcomes for savers.\u00a0 As a result, typical Australian pension savers have enjoyed 0.7% higher gains than British savers.<\/p>\n
In the latest paper from our Re-engineering Regulation research programme, Policy Exchange takes a deep dive into the Australian system, before proposing a number of ways in which the regulation of the UK pensions market might be improved. Policy Exchange estimates that typical savings pots could be boosted by some \u00a312,000 by adopting an Australian style focus on outcomes. The biggest beneficiaries would be the pre-retirement cohort which suffer the most under the current approach.<\/p>\n
1.A new high level objective of \u201cseeking to promote best retirement outcomes\u201d for regulatory bodies including The Pensions Regulator and the FCA. Existing objectives such as \u201cvalue for money\u201d and \u201csecurity\u201d ought to be downgraded to supplementary objectives, with an additional new supplementary objective of \u201csupporting financial best interest\u201d.<\/p>\n
2.\u2060 \u2060The Pension Regulator\u00a0 launches and maintains a centralised portal of DC pension fund performance. The initial focus would be on DC Master Trusts, but with a view to extending coverage to the defaults offered within large group personal pensions. This will increase, transparency, contestability, and will give consumers a better opportunity to compare investment decisions being made on their behalf.<\/p>\n
3.\u2060 \u2060The Pension Regulator\u00a0 reviews and reverses the regulatory preference for derisking strategies and \u2018lifestyling\u2019. This has led to poor outcomes, particularly for older savers close to retirement. As an alternative, the regulators should consider ways to boost innovation in the annuity market, for instance by changing rules \u2013 as Australia has done \u2013 to allow innovative retirement income products such as investment linked annuities to flourish.<\/p>\n
4.\u2060 \u2060Savers save more. We propose increasing the overall autoenrollment minimum contribution rates by 0.5% per annum for 4 years, to raise the overall contribution rate from 8% to 10%. This higher contribution rate will be better able to sustain living standards in retirement, and is closer to the Australian contribution rates of 12%. Such a change is also likely to help break the inflationary wage spiral the UK has recently been fighting, without negatively impacting total employee compensation.<\/p>","protected":false},"excerpt":{"rendered":"
Following the Chancellor\u2019s recent announcement that the new Labour Government would actively look at pension market reform, Policy Exchange has published a new paper setting out what might be learnt from the Australia\u2019s superannuation model. Growing Pension Capital \u2013 co-authored by Chris Mahon and Policy Exchange\u2019s Head of Political Economy James Vitali\u00a0 \u2013 argues that […]<\/p>\n","protected":false},"author":4,"featured_media":24185,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[],"class_list":["post-24184","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news"],"yoast_head":"\n