Private pensions in Australia 1. System design 2. Issues Choice - - PDF document
21/11/2012 Private pensions in Australia John Piggott Centre Director Private pensions in Australia 1. System design 2. Issues Choice and defaults Decumulation structures Administration costs Risk-sharing Adequacy
Safety net for adequacy purposes Compulsory saving for income replacement Voluntary saving for income replacement Universal Targeted Pay As You Go Funded Public provision Public provision Employment related Other Non tax preferred Private provision UK Basic and State Second Pension Tax preferred UK State Second Pension (contracted out) Private provision UK Individual Savings Accounts (ISAs) UK occupational pensions (including new auto-enrolment)
UK Guarantee Credit & Savings Credit Safety net for adequacy purposes Compulsory saving for income replacement Voluntary saving for income replacement Universal Targeted Pay As You Go Funded Public provision Public provision Employment related Other Non tax preferred Private provision Germany’s main earnings/points related pension Tax preferred Private provision Riester pensions Germany’s means- tested safety net
Safety net for adequacy purposes Compulsory saving for income replacement Voluntary saving for income replacement Universal Targeted Pay As You Go Funded Public provision Public provision Employment related Other Non tax preferred Australia’s Age Pension Private provision Australia’s Superannuation Guarantee Tax preferred Australia’s tax concessions for voluntary Super contributions Private provision
20 40 60 80 100 120 140 Netherlands Iceland Switzerland Australia UK Finland Weighted avg United States Canada Chile Denmark Israel Ireland Simple avg Japan NZ Poland Mexico Slovak R. Spain Portugal Norway Czech R. Germany Estonia Austria Italy Korea Belgium Hungary Slovenia Turkey Luxembourg France Greece
Source: OECD (2012) Pension Markets in Focus No.9, September 2012
Total assets of private pension schemes (% of GDP), 2011
AUS AUT BEL CAN CHL CZE DNK EST FIN FRA DEU GRC HUN ISL IRL ISR ITA JPN KOR LUX MEX NLD NZL NOR POL PRT SVK SVN ESP SWE CHE TUR GBR USA 20 40 60 80 100 120 20 40 60 80 100
Source: OECD (2011) Pensions at a Glance, 2011; Note: assumes entry into labour market at age 20 in 2008 and full career with average earnings under 2008 parameters
Private schemes (%) Public schemes (%) Plus 2009 increase of public pension of 11% above wage- price growth Plus 2013-2019 increase of mandatory contribution of 33%, from 9 to 12% of earnings
Net replacement rates from public and mandatory private schemes, 2008 parameters
Plus pension age increase
by 2023
Choice of fund legislation in 2005
Source: Cooper(2010) Super System Review
Lack of capacity Lack of price awareness Lack of interest Complexity Lack of comparability Frictions BUT SO Fund switching rates from 5% to 2% 2005 to 2009 (and anyway 80% because
Past attempts to embrace market forces not very successful...
Lost funds
Recent reforms don’t seek to
Facilitating not imposing choice....
Choice Self Managed Super Funds
Example choice experiment 100% safe 50:50 100% risky 1a There is a 9 in 10 chance of a return between x and y 27 51 22 1b There is a 1 in 10 chance of a return outside x and y 31 48 21 2a There is a 1 in 20 chance of a return above y 16* 54 30 2b There is a 1 in 20 chance of a return below x 50* 35 15* 3a On average, positive returns occur z years in every 20 28 34* 38 3b On average, negative returns occur 20-z years in every 20 22 44 33 4a On average, returns above bank account occur w years in every 20 21 52 27 4b On average, returns below bank account occur 20-w years in every 20 33 41 26
Source: Bateman et al 2010
But for choices that remain: important what to present and how to present it
0% 20% 40% 60% 80% 100% 1994 1998 2002 2006 2010
Proportion taken as a pension Proportion taken as a lump sum
Source: APRA (2005, 2012); Plan for life (2012) 1000 2000 3000 1998 2001 2004 2007 2010
ST annuities LT annuities Life annuities Superannuation pension benefits (% share) Annuities purchased ($ million, current)
Source: Cummings (2012) ‘Effect of fund size on the performance of Australian superannuation funds’; Note: 280 funds over the period from September 2004 to June 2010
3% 2% 1% 0%
0.8% 0.6% 0.4% 0.2% 0% 1 2 3 4 5 6 7 Log size 1 2 3 4 5 6 7 Log size Not for profit Retail Not for profit Retail Investment expense (%pq) Operational expense (%pq)
MySuper fund size/investment strategy $2b $5b $10b $20b Passive balanced 0.60% 0.46% 0.38% 0.32% Passive conservative 0.58% 0.45% 0.37% 0.32% Active balanced 0.94% 0.83% 0.70% 0.60% Active conservative 0.80% 0.70% 0.59% 0.49% Active balanced (with alternatives) 1.04% 0.89% 0.77% 0.66% Active conservative (with alternatives) 0.89% 0.76% 0.64% 0.54% Estimated total annual percentage costs for MySuper products of varying sizes (investment costs, plus operating costs and intra-fund advice)
Source: Cooper(2010) Super System Review
80% 60% 40% 20% 0% Projected Super assets and age pension entitlement
Australian Treasury (2010) ‘Intergenerational Report 2010’
Full pension (RHS) No pension (RHS) Total Australian Superannuation assets (LHS) 80% 96% 112% 128% 144% 2008 2015 2022 2029 2036 2043 2050 % of pop of pension age Assets as % of GDP
20 40 60 80 100 120 140 Japan Germany Mexico Ireland USA UK Poland Slovak R. France Korea Canada Sweden Finland Italy Norway Portugal Estonia Chile Belgium Switzerland NZ OECD Spain Slovenia Australia Austria Czech R. Hungary Israel Luxembourg Netherlands Turkey Greece Denmark Iceland 50% of Average earnings For Average earnings Net replacement rates from mandatory schemes for different earnings profiles, 2008 parameters
Source: OECD (2011) Pensions at a Glance, 2011; Note: assumes entry into labour market at age 20 in 2008 and full career with average earnings under 2008 parameters
5 10 15 20 25 Mexico USA Australia Estonia Korea Canada Iceland Ireland NZ UK Switzerland Sweden Poland Slovakia Denmark Czech R. Netherlands Turkey OECD Germany Hungary Finland Norway Portugal Austrria France Belgium Italy Spain Slovania Luxemburg Greece 2009-10 2049-50
Public pension expenditure (% of GDP), 2010 and 2050
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