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 Sustainability • 3. Conclusion 1

21/11/2012 System design Universal Safety net for adequacy purposes UK Guarantee Credit & Savings Credit Targeted Public provision UK Basic and State Second Pension UK State Second Pension Pay As You Go Private provision (contracted out) Compulsory saving for income replacement Public provision Funded UK occupational Private provision pensions (including Employment new auto-enrolment) related Voluntary saving for Tax preferred UK Individual Savings income replacement Accounts (ISAs) Other Non tax preferred System design Universal Safety net for adequacy Germany’s means- purposes tested safety net Targeted Public provision Germany’s main earnings/points related pension Pay As You Go Private provision Compulsory saving for income replacement Public provision Funded Private provision Employment related Voluntary saving for Tax preferred Riester pensions income replacement Other Non tax preferred 2

21/11/2012 System design Universal Safety net for adequacy purposes Australia’s Targeted Age Pension Public provision Pay As You Go Private provision Compulsory saving for income replacement Public provision Funded Australia’s Superannuation Guarantee Private provision Employment Australia’s tax related concessions for Voluntary saving for Tax preferred voluntary Super income replacement contributions Other Non tax preferred System design Total assets of private pension schemes (% of GDP), 2011 140 120 100 80 60 40 20 0 Greece France Slovenia Hungary Belgium Korea Austria Estonia Germany Norway Spain Slovak R. NZ Japan Simple avg Israel Denmark Chile Canada United States Weighted avg Finland UK Australia Netherlands Luxembourg Turkey Italy Czech R. Portugal Mexico Poland Ireland Switzerland Iceland Source: OECD (2012) Pension Markets in Focus No.9, September 2012 3

21/11/2012 System design Net replacement rates from public and mandatory private schemes, 2008 parameters Public schemes (%) 120 GRC 100 Plus 2009 increase of public LUX TUR pension of 11% above wage- AUT price growth SVN ESP 80 ITA PRT Plus 2013-2019 increase of FIN mandatory contribution of CZE HUN 60 FRA 33%, from 9 to 12% of earnings DEU NOR BEL CAN USA KOR NZL Plus pension age increase 40 JPN CHE of 2 years, from 65 to 67 GBR SWE POL SVK DNK NLD IRL by 2023 EST ISR 20 ISL AUS CHL MEX 0 0 20 40 60 80 100 Private schemes (%) 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 Issues • Choice and defaults • Decumulation structures Administration costs • • Risk-sharing • Adequacy • Sustainability 4

21/11/2012 Choice and defaults Past attempts to embrace Lack of capacity market forces not very successful... Lack of price awareness Fund switching rates from Lack of comparability 5% to 2% 2005 to 2009 Choice of fund BUT SO legislation in 2005 (and anyway 80% because Lack of interest of switching employers) Complexity Frictions Recent reforms don’t seek to Facilitating not imposing choice.... � � � � overstate disengagement. Lost funds MySuper Choice Self Managed Super Funds Source: Cooper(2010) Super System Review Choice and defaults But for choices that remain: important what to present and how to present it 100% 50:50 100% Example choice experiment safe 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 5

21/11/2012 Decumulation structures Superannuation pension benefits (% share) Annuities purchased ($ million, current) 100% 3000 Proportion taken as a pension ST annuities 80% 2000 60% 40% Proportion taken as a lump sum 1000 LT annuities 20% Life annuities 0% 0 1994 1998 2002 2006 2010 1998 2001 2004 2007 2010 Source: APRA (2005, 2012); Plan for life (2012) Administration costs Investment expense (%pq) Operational expense (%pq) 0.8% 3% Not for profit Not for profit Retail Retail 0.6% 2% 0.4% 1% 0.2% 0% Log size Log size 0% -1% 1 2 3 4 5 6 7 1 2 3 4 5 6 7 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 6

21/11/2012 Administration costs Estimated total annual percentage costs for MySuper products of varying sizes (investment costs, plus operating costs and intra-fund advice) MySuper fund $2b $5b $10b $20b size/investment strategy 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 1.04% 0.89% 0.77% 0.66% (with alternatives) Active conservative 0.89% 0.76% 0.64% 0.54% (with alternatives) Source: Cooper(2010) Super System Review Risk-sharing % of Projected Super assets and age pension entitlement Assets as pop of % of GDP pension age 144% 80% 60% 128% 40% 112% Full pension (RHS) 20% 96% No pension (RHS) Total Australian Superannuation assets (LHS) 0% 80% 2008 2015 2022 2029 2036 2043 2050 Australian Treasury (2010) ‘Intergenerational Report 2010’ 7

10 15 20 25 100 120 140 20 40 60 80 0 5 0 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 Mexico Public pension expenditure (% of GDP), 2010 and 2050 Japan Net replacement rates from mandatory schemes for different earnings profiles, 2008 parameters USA Germany 2009-10 Australia Mexico For Average earnings 50% of Average earnings Estonia Ireland USA Korea 2049-50 UK Canada Poland Iceland Slovak R. Ireland France NZ Korea UK Canada Sustainability Switzerland Sweden Sweden Finland Adequacy Poland Italy Slovakia Norway Portugal Denmark Estonia Czech R. Chile Netherlands Belgium Turkey Switzerland OECD NZ Germany OECD Hungary Spain Finland Slovenia Norway Australia Austria Portugal Czech R. Austrria Hungary France Israel Belgium Luxembourg Italy Netherlands Spain Turkey Slovania Greece Luxemburg Denmark Greece Iceland 21/11/2012 8

21/11/2012 Conclusion 1. System design different to most others 2. Issues • New choice architecture for accumulation Still limited decumulation choice or defaults • • Recent reforms to keep costs low • Risk-sharing though age pension & housing • Adequacy where it matters • Sustainability: third lowest pension expenditure now and in 2050 (but endless battles about tax expenditure) Email j.piggott@unsw.edu.au Web www.cepar.edu.au Twitter @cepar_research Questions? Sign up for our newsletter Follow us on twitter 9