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The Lessons from Down Under

Senior Portfolio Manager
November 30, 2010

The experience of Australia is useful in looking at how NEST might work in the UK. A government-mandated workplace pension scheme has been in place there since 1992. Although praised for demanding a relatively high level of contributions, the system now faces challenges.

Unlike NEST, the Superannuation System, or “Super”, involves no central body managing and investing contributions, but instead uses about 300,000 separate funds. While members can choose their own scheme and strategy, an estimated 80% are in their scheme’s default option. For most this is a result of disengagement.

Default options across the system vary widely, but are in some cases inappropriate for the typical member, given that account balances average below A$25,000. The system has also recently produced undesirable outcomes: a heavy weighting to equities in many strategies meant the global financial crisis hit the fund balances of members approaching retirement.

To address these criticisms, a recent government-directed review has suggested the creation of MySuper—a universal default fund which would aim to improve investor outcomes through greater scale, transparency and comparability. It would deal with lack of engagement by making the default a cost-effective way of providing desirable outcomes for the typical member, and thereby protect the majority that don’t make active choices.

The Cooper Review identified target date funds as an attractive strategy for MySuper to adopt—and, frankly, we agree. The strategy would address the needs of disengaged individuals while they are saving by automatically adjusting the investment strategy according to their capacity to take on risk. And it could also be designed to provide an income in retirement—something that Super currently lacks. In providing these benefits, it should fit well within the MySuper concept as outlined by the Cooper Review and, indeed, the original ideals of Super itself. However, it remains to be seen which recommendations, if any, will ultimately be adopted.

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