As UK employers get to grips with pensions auto-enrolment, there are lessons to be learned from schemes in Australia and New Zealand
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- The Australian Superannuation Guarantee Fund was introduced 20 years ago as a compulsory scheme.
- New Zealand’s Kiwisaver, which was launched in July 2007, more resembles auto-enrolment in the UK, with employees allowed four weeks to opt out.
- Areas where UK employers can learn from both implementations include levelling down, administration and financial advice.
Six years after New Zealand introduced its Kiwisaver and 20 years after Australia launched its Superannuation Fund, both countries can use the lessons they have learned to offer the UK guidance as it wades into the deep end of auto-enrolment.
The Kiwisaver scheme was introduced in July 2007 to kick-start a culture of saving in New Zealand. Any new employees aged between 18 and 65 are automatically enrolled into their employer’s pension plan, with an option to opt out within four weeks.
Patrick Nolan, chief economist at UK policy think-tank Reform, says: “People point to Kiwisaver as an example of how auto enrolment will be a success in the UK, but we have to be cautious about making comparisons. Kiwisaver has massive participation, with half of New Zealanders now in the scheme. But if you look at that participation, it is actually [due to] people opting in, not the auto-enrolment.
“The argument in the UK is that the inertia effect will be quite powerful. Employers have to enrol staff and employees won’t be bothered to opt out. The success of Kiwisaver isn’t due to inertia; people decided to enter the scheme because it was so heavily subsidised.”
A government-funded, tax-free payment of NZ$1,000 (£530) acts as an incentive for staff to join Kiwisaver. Members can also withdraw up to NZ$5,000 (£2,650) in certain circumstances, such as when buying their first property, in times of severe hardship, or if they become severely disabled before retirement.
Until 2008, New Zealand government subsidies on both employee and employer contributions made the scheme very attractive. But the cost to the government became prohibitive, so subsidies for employers were removed, and minimum employer contributions were cut from 4% to 2%.
Simple tax system
Another advantage is that New Zealand’s tax system is quite simple, with everyone paying tax from the first dollar of earnings. As a result, the country’s tax authority is the administrator of Kiwisaver, so contributions can be deducted from wages at source and paid via the Inland Revenue Department.
Australia’s Superannuation Guarantee Fund became compulsory for all employers in July 1992, placing responsibility on them for employees’ retirement savings. To begin with, employers contributed a minimum of 3% of employees’ salary to their pension schemes. Since 2002, all staff aged between 18 and 70 who earn more than A$5,400 (£3,545) a year have received a minimum contribution of 9% of annual salary. This will rise to 9.5% in July 2013, then gradually increase to 12% by 2019.
Pauline Vamos, chief executive officer at the Association of Superannuation Funds of Australia, says: “The gradual increase in rate made the transition relatively smooth for most employers. But it is fair to say employers were not necessarily supporters of the system, with smaller employers particularly wary.”
David McNeice, senior consultant at Towers Watson, adds: “It was not as complex and did not have as many steps as what is being introduced in the UK. The Australian experience has not been too bad, but plenty of employers were caught out by administrative complexities.”
Australia implemented its system long before technology allowed electronic enrolment and contributions, so its early days were filled with paper forms and cheques. “More recently, there has been a shift to electronic submissions of information and payments,” says Vamos. “Payroll providers have also integrated superannuation payments into the services they offer. Moving forward, there will be a shift to all contributions and information being transmitted electronically using a common standard.”
Richard Wilson, senior policy adviser at the UK’s National Association of Pension Funds, says small pots and transfers, and levelling down of contributions are lessons the UK can learn from Australia. “There was a lot of levelling down of employer contributions in Australia,” he says. “We need to make sure that doesn’t happen here. That is why we have the Pension Quality Mark, trying to encourage people to pay in at that higher level.”
Design of default funds
The design of default funds will be important for auto-enrolment. In Australia, it has been less common for funds to be moved into safer investments in the run-up to retirement, as the UK does with lifestyling funds. Wilson says: “A lot of people who thought they would get a good income suddenly found, the year before they were going to retire, that it was very different than expected because of a sudden change in the stock market. It is important to design default funds that keep people safe and away from big shocks.”
Drawing on Australia’s experience, Vamos adds: “Ensure that funds are active in providing information and advice to members, but maintain appropriate default arrangements because many or most members will not engage or make choices.”
Along these lines, it is important that employees are provided with plenty of financial education and advice. Reform’s Nolan says: “You get a whole lot of people suddenly being in defined contribution (DC) pensions who have never had them before. It’s a real challenge for the industry, which is used to dealing with people who are savvy and understand investment risk.”
It is also important for employees to understand the purpose of the pension scheme in the first place. McNeice adds: “Australia is more than 20 years into its scheme, and there is still confusion, discussions and debates as to what the real purpose is. It has made what I consider an error in that it has never properly explained the scheme to the population.”
With print and television adverts from the Department for Work and Pensions under way since 2012, and many employers actively communicating auto-enrolment to staff, the importance of employees taking responsibility for their own future is being spelt out to them. Now employers can take heed of the lessons learned from New Zealand and Australia as auto-enrolment moves forward.
The Australian Superannuation Guarantee Fund
The Australian ‘Super’ is a fullcompulsion scheme introduced in 1992.
When it was fi rst implemented, all employers had to contribute a minimum of 3% of annual salary to their employees’ pensions. Today, all employees aged between 18 and 70 who earn more than A$5,400 (£3,545) a year receive a minimum employer contribution of 9% of annual salary. Under legislation passed in 2012, this is set to rise to 12% by 2019. There is no required employee contribution.
The Kiwisaver was introduced in July 2007 to kick-start New Zealanders’ saving habit.
Employees aged between 18 and 65 are auto-enrolled into their employer’s pension scheme, with the option to opt out within four weeks. Membership is not compulsory but, where employees contribute, employers currently make compulsory contributions of 2%.
A government-funded NZ$1,000 (£530) tax-free payment is an incentive for staff to join the scheme. The Kiwisaver also includes a provision for members to withdraw up to NZ$5,000 (£2,650) from their accounts in certain circumstances, such as the purchase of their first property.
AREAS WHERE THE UK CAN LEARN FROM THE ANTIPODES
- Small pots and transfers
- Levelling down
- The design of default funds
- Financial education and advice