Can we learn from Australia's experience and avoid having to do a boomerang on freedoms?
What can we learn from Australia's approach to retirement?
With the UK taking its first steps into the brave new world of pension freedoms, it's natural to consider if there are any lessons to be learnt from abroad. Making international comparisons of retirement systems is a complex business. Many factors shape each nation's system: social, economic, demographic, political, cultural. No two systems are alike.
Varying regulations ensure the retirement experience can be markedly different from one country to the next. Although we're not responsible for the rules, we can certainly make ourselves aware of the pitfalls and opportunities which our clients need to consider.
Going the extra mile to compare retirement markets
The Organisation for Economic Cooperation and Development (OECD) is a respected international body formed to promote policies which will improve the economic and social well-being of people around the world. With this in mind, the OECD carried out a comparison of retirement markets. They have highlighted two key challenges for all markets within their Pensions at a glance1 study:
1. How do we give people an adequate income in retirement?
2. How do we provide for an ageing population?
Addressing the need for people to save more money
If people are to have an adequate retirement income the issue of saving for retirement needs to be tackled. Published before the UK pension freedoms, The Mercer Global Pension Index2 highlights that the UK population needs to save more money for their retirement income but also appreciates that auto-enrolment will help this.
This mirrors the views of customers, with 47% of those surveyed in March 20153 saying they were worried about not having enough money in retirement to provide an adequate standard of living.
Australia: doing a boomerang on freedom?
Australia can be seen as a benchmark country for its attitude and action towards retirement provision2. This is in part due to its implementation of superannuation, the country's equivalent to auto-enrolment, in 1992.
This initiative is still evolving, with mandatory employer and employee contributions gradually increasing. Within this context, significant reforms to the Australian state pension system were made in 2009. These changes were designed to ensure that people not only had a decent standard of living, but also had a greater incentive to work.
But it's the income aspect of retirement which is causing debate. Currently individuals are able to release their pension funds at 55, as recently introduced in the UK. However, there have been pressures from some quarters for the Australian market to go the other way.
The system has had its share of critics. The Mercer study suggests the situation could be improved if the freedoms were tempered and it became a requirement to take part of the retirement benefit as an income stream2. This feeling was supported by the Financial System Inquiry4 as they highlighted that:
"There is an implicit assumption that individuals have the capacity and options available to them to manage their income and risks in retirement. A large body of evidence in behavioural economics demonstrates that poor outcomes can emerge from complex decision making at critical junctures, such as for retirement."
At our time of change, this apparent 'shot across the bows' of Australia's retirement freedoms was understandably jumped on by the British media.
Since 2004, Aviva has been listening to thousands of customers across North America, Europe and Asia to understand their attitudes to saving and retirement. While the underlying systems may be different, the research shows that there is at least one theme in common - customers are worried they won't have enough to maintain a decent standard of living.
No one system works for all – so why should one product?
While it seems that there is no perfect system, it would be dangerous to jump to conclusions and equally dangerous to lift and drop a solution from one country to another. The challenges, however, are common - more must be done to build client confidence throughout the period they are saving for retirement.
To bring the lessons of the Australian experience closer to home, it's tempting to conclude that just as one solution doesn't fit all on a global level, a single option can't always be expected to fulfil the needs of an individual client throughout the course of their retirement. This makes it critical that each client's circumstances are taken into account and a plan made specific to them, for retirement savings and later income.
After all, nothing's perfect for all of the people, all of the time.
For more expert insight and opinion on retirement planning in the pension freedom world, Aviva's Retirement Spotlight is well worth a visit. You can even pick up some handy letter and email templates while you're there to help build more rewarding client conversations.
Alistair McQueen, Aviva Retirement Solutions - Financial Research
1Pensions at a Glance OECD and G20 Indicators
2Melbourne Mercer Global Pension Index, October 2014
3Aviva Consumer Attitudes Survey
4Australian Financial System Inquiry (http://fsi.gov.au 2004 LF90108 08/2015)