Transcript Welcome from Pat Ryan

pensions – benefits – asset management – hr solutions
The Australian Mandatory Pensions
System
Donald Duval
Dublin Castle
5th May 2006
Agenda
• Background
• What did Australia do?
• Why?
• Where is the system now?
• What worked and what didn’t?
Cultural background
• Young country (First fleet 1788,
Federation 1901)
• Personal relationships trusted
more than legal ones
• Very largely British and Irish
migrants up to 1939 (Both
transportation and voluntary)
• Huge landmass but population
heavily urban
• Other white migrants after the
war (especially Greeks and
Italians)
• !972 White Australia policy ended
and subsequently largely Asian
migrants
• History of corruption in Police
and State governments
• Significant proportion of selfemployment
• Key industries agriculture and
mining
• In 1970s moved from economic
dependence on Britain to
economic links with Asia and
defence links with USA
Political and Economic position in 1980s
• Low savings rate
• High inflation driven by wage inflation
• Currency crisis
• Stable and successful financial institutions
• Strong collective bargaining (National wage cases)
Pensions in 1980s
• State Pension
– Flat rate
– Around 25% average earnings
– Fully means tested (50% withdrawal rate)
– Two thirds of over 65s got full State Pension
Private superannuation
• Occupational schemes (largely DB) covered approx
50% of employees
– Concentrated in white collar and certain sectors (eg mining)
– Personal pensions sold by insurance companies to self-employed
and employed without occupational super
– Very little coverage in Retail, Hospitality, Agriculture
– Limited coverage in Construction, Ports
– Benefits invariably lump sum (as tax rate on lump sums was no
more than 2.5% - pensions taxed as income)
The mandatory system
• Contributions started at 3%
and phased up to 9%
• All employer contributions,
but explicit trade off for wage
increases
• Fund chosen by employer
subject to collective
bargaining
• Self employed not required to
contribute
Contribution rates
1988 to 1992
3%
1992 to 1995
5%
1995 to 1998
6%
1998 to 2000
7%
2000 to 2002
8%
2002 onwards
9%
Types of fund
• Large industry wide funds established by trade unions
(trustees 50% union 50% employers)
• Single company funds (trustees 50% employer 50%
member)
• Retail funds provided by banks, insurance companies,
fund managers etc
• Self managed funds of less than 5 members
Other changes made to system
• Tax bias in favour of lump sums removed
• Salary related limits replaced by flat rate limits
• Compulsory preservation to age 55 introduced
• Allocated pensions introduced
• ETT changed to TTT by introducing 15% tax on contributions
and investment income (with corresponding reduction in tax on
benefits)
• Means test tightened (only one third of people reaching age 65
qualify for full Age Pension)
• Personal tax charge on higher rate tax payers in respect of value
of pension accrual (DB) or contributions (DC)
Key objectives
• Investment markets to be used by all Australians
• Increase national savings
• Reduce inflationary pressures
• Efficient allocation of savings
• Reduce dependence on age pension
• Improve savings incentives
• Improve living standards of the retired population
Reasons for using private sector
• No wish to increase role of State
• Risk of diversion of the additional savings
• Private sector better at allocation to investment
• Lack of trust in government
• Union desire for role in running funds
Asset allocation at June 2005
Other
10%
Cash
7%
Australian shares
34%
International fixed interest
5%
Australian fixed interest
13%
Property
8%
International shares
23%
Membership (000s) and assets (A$bn) at
June 2005
100%
596
175.2
80%
9700
60%
237.2
Self m anaged
Retail
2755
Public sector
Industry
Corporate
40%
128.6
9524
20%
119.8
0%
707
Mem bers
52.5
Assets
Rates of return 2004/2005
14.0
13.2
13.0
12.0
12
11.3
11.0
10.0
9.5
9.0
8.0
7.0
6.0
5.0
Corporate
Industry
Public sector
Retail
Developments since system started
• Member choice of investment
• Funds offering financial advice
• Wider range of services (eg mortgages)
• Reductions in charges
Impact of the mandatory system
• Increase in private savings
• Wider ownership of investments
• Voluntary employer contributions reduced
• Voluntary individual contributions increased
• Age Pension maintained at more than 25% average
earnings
• Retired women still much poorer than men
Impact on company provision
• Defined benefit schemes closed to new members and
often closed to future accrual
• Most employers contribute only the 9%
• Coverage 90% of all employees
• Voluntary member contributions now becoming
significant
Mistakes to be avoided
• Mandatory superannuation separated from other
pensions policies
• Killing of DB schemes through tax and regulation
Keys to success
• Diversity of vehicle
• Competition
• Large employer and industry sector
• Continued development of system
• Diversity of investment
• Absence of guarantees
• Active supervision