The best way to structure and implement personal accounts in the UK has been the subject of much debate in recent years and many of the details are yet to be ironed out.
Consultation is continuing into the charging structure that should be adopted as well as investment choice and means testing procedures.
Australian Minister of Superannuation and Corporate Law Nick Sherry says the UK should draw on the lessons Australia learnt in implementing compulsory savings as a guide to what works and what should be avoided.
The biggest difference between the two systems is that superannuation is compulsory in Australia, whereas there will be an opt-out available on personal accounts.
Sherry says UK predictions that 80 per cent will remain in personal accounts rather than opting out is an accurate forecast.
He says: “The percentage of people saving in the UK is around 40 per cent at the moment so this will significantly increase coverage, even under an opt-out system.”
Sherry says the main structural differences between the Australian superannuation system and personal accounts involve the administration systems and fee structure.
He says one of the major problems with superannuation in Australia is that it has a devolved administration system. Sherry says: “We didn’t set up a central administration and funds management hub as proposed in the new UK system.”
The lack of a central system is one of the drawbacks of the Australian system. As employees often open a new super account with their employer’s preferred fund when starting a new job, many people have lost track of old super accounts.
Sherry says: “We have over six million lost accounts worth $12bn. You won’t have that in the UK because you are going to have a centralised admin-istration system.”
He says the other critical difference between the two systems is the charging structure.
The Personal Accounts Delivery Authority is consulting on how members of personal accounts should pay for the new system. The options include an annual management charge, an initial fee, an annual fee, a contribution charge or a combination of AMC and contribution charge.
Sherry says one of the downfalls of the Australian system is that the charging structure is too complex and many consumers do not understand what they are paying for and why.
He says: “One of the complexities in the Australian system is that we have too many different fees and charges that people find very difficult to understand.
“I think it is very important to keep it simple so I commend the simple annual fee charge approach in the UK. That will be one of the great strengths of the UK system. I think it will be much better understood that the fee regime that we have got in Australia.”
Using a central administration system will also help to keeping costs low for the UK’s pension scheme and Sherry says some fees and charges under superannuation are not only too complex but also too high.
He says: “There are a significant number of members who are in funds that I would consider to have fees that are too high and you will avoid that in the UK.”
One of the points yet to be finalised in the UK is how many investment choices consumers should be given within personal accounts.
Sherry says that, like the charging structure, investment options should be kept simple and consumers should not be forced to make sophisticated investment decisions.
He says: “First, you need a well-designed default investment because 80 per cent of people in Australia default on investment. So having made a system compulsory, or in the case of the UK soft compulsion, do not force sophisticated investment decisions or options on individuals.”
He says there should be four or five options that individuals may select including a bond, cash, equity or socially respon-sible investment option.
He says: “When you move beyond four or five investment options it starts to add to cost with very little take up. And it starts to become too complex.”
Sherry praises UK proposals to prohibit short-term withdrawals of money from personal accounts, saying a retirement savings scheme should be kept for that purpose only.
He says: “The difficulty in allowing early withdrawal is that it will lower the retirement income that people would otherwise receive.”
He says even where consumers are seeking to access their savings for investment purposes, such as the purchase of a house, it can significantly lower their retirement income.
“It is important in retirement savings to have diversification of investments. By all means, have some property investment and most funds in Australia do but we do not allow investment in your own home, it has got to be arms length. The difficulty you run into is if you allow personal property, it’s not a diversified portfolio.”
Many have expressed concern over the future sustainability of defined benefit pension schemes following the introduction of personal accounts.
Sherry says before superannuation was introduced in Australia 20 years ago, a rapid decline in occupational defined benefit funds was occurring anyway because the labour market was changing.
He says: “Employers were finding it difficult to maintain the funding of a defined benefit because of longevity. You had correlation of decline in defined benefit but it was not caused by the introduction of compulsion, it occurred at the same time and it was inevitable anyway.”
Sherry says in the UK, defined benefit schemes are under significant pressure because of affordability and longevity and as a result a lot of employers are shutting them down.
He says: “You have got the closure of defined benefits in the UK at the moment without the new national personal accounts system happening. The argument is not whether to replace them, it is what to replace them with.”