UK bets on Aussie-style pension revamp to boost ailing economy

Australia’s living in the future. And it’s not just its time zone.

Its pensions industry is light years ahead, doubling in size every five years. It’s far outpacing the U.K., with Australian workers’ funds even helping to foot the bill for British housebuilding and infrastructure.

Now the U.K.’s Chancellor, Rachel Reeves, wants to crib from the Aussie’s success — and have U.K. companies make a profit by building up Britain.

She’s been taking lessons from her Antipodean counterparts, pledging sweeping changes to the fragmented retirement system by merging hundreds of billions of pounds held in thousands of private pensions into a handful of “megafunds.”

Fact-finding missions Down Under have helped. U.K. Treasury officials have met with Australian superfunds for inspiration, and the City of London Corporation’s boss flew to Melbourne this year to learn about the success of the country’s booming retirement system.

If she can pull it off, it’s win-win: Reeves’ self-described “biggest set of pension reforms in decades” would allow British funds to reach the scale needed to invest in riskier assets and infrastructure to boost returns for savers and, at the same time, give the economy a much-needed growth boost.

But Reeves and the retirement industry will need to pull a lot of levers to boost pension investment in U.K. infrastructure and achieve growth — something which took Canberra decades to achieve.

“I think, directionally, the U.K. is getting there, but it’s not going to happen in a real hurry, given the long-term change that needs to happen in the structure of the industry,” said Damian Moloney, deputy chief investment officer at AustralianSuper, Australia’s largest superfund.

The Australian superannuation system, or “super,” as it is colloquially known, is the fastest-growing pension industry in the developed world and differs significantly from the U.K. pension landscape. 

It was launched in 1992 to create a brand new system of industry and corporate defined contribution pension schemes to pay for workers’ retirements through a mandatory system, fully funded by employers through legislation. 

The Superannuation Guarantee means employer contributions rise every few years, and it’s set to hit 12 percent of workers’ earnings from July. 

Although the U.K. introduced auto-enrollment in 2012, retirement saving in Britain isn’t compulsory, and both employees and employers split paying a lower contribution rate of eight percent.

Britain’s pensions landscape is still a confusing mix of thousands of workplace, private, public, and local government schemes, all with differing sizes, benefits, returns, and investment structures.

The differences are stark, and it will be a long slog for the U.K.’s top finance minister to create an Australian-lite pension system. 

Make them big

Reeves’ main ambition is economic growth — but that’s been hard to come by since July’s election. If she needs something to quickly move the dial, it’s unlikely to come from pensions.

Reeves is starting almost from scratch, like the Australians did nearly four decades ago, so it could take many years for savers and the economy to reap any benefits.

One of the main pillars of Reeves’ planned reforms is, like Australia, to consolidate private workplace schemes — otherwise known as defined contribution schemes — into a dozen-or-so megafunds worth a minimum of £25 billion each, starting from 2030.

The idea is that through scale, these funds can invest in riskier assets, funding British projects and businesses, while boosting savers’ pension pots. Size will also allow them to hire more professionals with investment experience.

The Australian superannuation system has $4.2 trillion in assets as a result of forward thinking back then, and at the current pace, it is tipped to become the second-largest in the world by the end of the decade.

From what was once thousands of workplace, corporate, and industry funds, there are now only 95 superfunds approved by the Australian Prudential Regulation Authority, with 17 having over $50 billion in assets.

AustralianSuper and Australian Retirement Trust are the largest, with more than $300 billion in assets each. 

This is one of the major challenges Reeves faces: how to get around a thousand private pension schemes to merge when they may not want to — and quickly. Industry bodies in the U.K. appear resistant to parts of the plan, and have already warned the government that a £25 billion minimum threshold may not be achievable.

But if the chancellor is keen to follow Australia to the letter, there are some levers she can pull. 

Carrot and stick

In 2004, stringent licensing requirements were introduced in Australia, forcing pension trustees to register with the financial regulator, the Australian Securities and Investments Commission (ASIC), as well as tweaking rules to make it easier for superfund members to be transferred — which made many trustees of smaller funds give up and merge into larger ones. 

“The regulator was very keen to kick-start consolidation around the turn of the century,” Moloney said. 

Successive Australian governments of the time also stepped in to help the process, Moloney explained, namely by giving tax relief for merging superannuation funds, and allowing the bulk transfer of members and their benefits from one superannuation fund to another without consent, called “successor fund transfers.”

More recently, in 2021, APRA introduced the “performance test,” another regulatory barrier to force schemes not providing adequate investment performance to exit the market.

“I think the industry here can benefit from some of those factors,” Moloney said. “We had to do [this] in Australia, and [it] forced trustees to think beyond their patch.”

Reeves is considering contractual overrides to move scheme members from a poorly performing fund to a better one, but there are still levers the Australians used that are missing from her plan.

“The introduction of stringent licensing requirements for superannuation fund trustees led to a substantial decline in the number of funds,” a spokesperson for the Association of Superannuation Funds of Australia said. “There may be challenges for the U.K. in replicating the Australian example as there is no evidence that the U.K. will introduce stringent licensing requirements for U.K. pension fund trustees.” 

Closer to home

The next challenge for the U.K. chancellor is convincing megafunds to replicate their Antipodean counterparts by getting British pension funds to invest more in domestic infrastructure and stocks — no mean feat.

According to government figures, around 20 percent of workplace assets are invested in the U.K., compared to around 50 percent a decade ago, which is vastly different from Australian superfunds. 

Scale and investment expertise are important in attracting domestic investment, Moloney said, but so are tax breaks, another crucial cog missing from the U.K. government’s pensions plan.

“There are a couple of other things that work really to our advantage in Australia that you’re probably not going to see here [in Britain] for a while, or probably never see, that have made the domestic focus really strong,” Moloney said.  

“The investment landscape changed in the 80s and 90s with a couple of tax changes that biased domestic investment,” he said.

These include the controversial dividend imputation — better known as “franking credits” — introduced by Paul Keating’s Labor government in 1987, which is a tax credit on dividend payments to Australian investors.Plus, there’s a hefty 33.3 percent capital gains tax discount for superannuation returns.

“They’re not the greatest tax ideas, by the way, but they meant that superfunds have a very strong domestic bias, and funds have around 50 percent [investment in Australia],” Moloney said.

Geoff Warren, an honorary associate professor at the Australian National University, agrees that tax breaks and scale help, but cautioned against any attempt to force megafunds to invest locally — something the government has hinted at, but has yet to do. 

“Infrastructure and property are a scale game, so you need to be big for that, otherwise, you’re just not in the game,” he said. 

“But the idea that if you make them bigger, they’ll invest in the U.K. and U.K. infrastructure sounds like they’re wanting to use public money for private purposes — and no government in Australia forced the superfunds to do anything like that.”