Following the Chancellor’s 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’s superannuation model.

Growing Pension Capital – co-authored by Chris Mahon and Policy Exchange’s Head of Political Economy James Vitali  – argues that the UK regulatory framework for pensions was designed for an era of defined benefit schemes with broadly fixed outcomes.

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.

This framework is proving increasingly outdated, as defined contribution schemes have now become the dominant vehicles for the current generation of pension savers.

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.

While the recent King’s 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.

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.  As a result, typical Australian pension savers have enjoyed 0.7% higher gains than British savers.

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 £12,000 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.

Growing Pension Capital recommends:

1.  A new high level objective of “seeking to promote best retirement outcomes” for regulatory bodies including The Pensions Regulator and the FCA. Existing objectives such as “value for money” and “security” ought to be downgraded to supplementary objectives, with an additional new supplementary objective of “supporting financial best interest”.

2.⁠ ⁠The Pension Regulator  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.

3.⁠ ⁠The Pension Regulator  reviews and reverses the regulatory preference for derisking strategies and ‘lifestyling’. 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 – as Australia has done – to allow innovative retirement income products such as investment linked annuities to flourish.

4.⁠ ⁠Savers 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.