As the Association of Superannuation Funds of Australia (Asfa) prepares to hold its third annual Asia-Pacific forum, chief executive Pauline Vamos says a residual role for the public sector is unavoidable when setting up a workable mandatory retirement scheme.
The one-day forum to be hosted by the pension fund body in Beijing on March 13 will explore cross-border investment opportunities for pension funds, but a big portion of the agenda is dedicated to discussing pension-system design.
“In many pension frameworks, fund managers and investment houses have too much control and this results in the tail wagging the dog,” says Vamos. “Any system has to give power and control to the trustees, and this power has to be backed up by regulators that have the ability to enforce the rules.”
On previous visits to the region, Asfa has encountered an eager audience of regional policymakers keen to learn from Australia’s experience. As at December 31, the country had a total of A$1.8 trillion in assets accumulated in its compulsory superannuation scheme.
“We don’t ever suggest that other countries simply implement the Australian system,” clarifies Vamos. “Our super scheme was developed under unique circumstances when political opinion in Australia was aligned and there was a collective will to get things moving. We also have a tax structure that encourages people to put money towards their retirement.”
She says these conditions don’t necessarily exist in other countries, so “everyone must follow their own path”.
Next week’s forum is being attended by upwards of 70 pension fund managers, government officials and policymakers, and service providers. Panellists include: Darren McShane, executive director of regulation and policy for Hong Kong’s MPF scheme; Sally Wong, head of the Hong Kong Investment Funds Association; and Jeremy Cooper, chairman of retirement income at Australian fund manager Challenger.
In 2009 and 2010, Cooper was appointed by the Australian government to head a wholesale review into the superannuation system, known as the Cooper Review.
Vamos says Hong Kong’s MPF scheme is a standout in the region for its good policy and governance framework. That said, "contribution levels are still too low and employers don’t always comply with the system," she notes. "Unfortunately the government doesn’t have the resources or the inclination to chase such non-compliers.”
Those countries still contemplating a compulsory system need to find the right balance between private and public provision of retirement income, and give as much control as possible to trustees, says Vamos.
She suggests a carrot-and-stick approach. “A culture of saving already exists in Asia, so it should be easy to offer people incentives to put money away for their futures. Governments can urge people to comply by saying their access to post-retirement healthcare and aged-care benefits will be restricted if they don’t save.”
Contribution levels need to be high enough to counter the cost of fees and inflation, which typically wipe out 2% of annual returns. Australia has a compulsory contribution rate of 9% and plans to raise that to 12% over the next seven years.
“Systems also can’t limit investments to government bonds and cash. This isn’t sustainable,” says Vamos.
Helping people to understand how much they need to accumulate before retirement is an important element in engaging members. “We have learned to collect data on individuals and do it quickly so you can begin to communicate with them as soon as possible,” notes Vamos.
“Communicate with them digitally and make the message clear," she adds. "Don’t talk in lump sums on retirement, talk about income streams. Explain how much money a person needs to have in their account to earn a certain annual income once they stop working. It is always a lot more than people realise.”
Vamos concludes: “Our key message is always about taking a long-term view. The amount of money members put in and the amount of time they invest that money are the biggest drivers of outcome.”