April 5, 2024

Why the whole world is suddenly paying attention to Aussie super

As the assets under management in the Australian superannuation system continue to grow – now up to $3.7 trillion – and as populations around the world age, Australia’s compulsory savings regime is attracting global attention.

While it has its shortcomings – including the need to evolve from a primary focus on worker savings to one that also caters for retirees – the system’s success in accumulating assets is becoming recognised.

The 30-year-plus system, which is unique in the world, is delivering unprecedented levels of savings for Australians approaching retirement and playing a key role in the development of a much more sophisticated domestic capital market.

The latest global influencer to call out the virtues of the system is the co-founder and chief executive of asset manager BlackRock, Larry Fink, in his latest letter to investors.

The 71-year-old Fink manages a corporation with some $US10 trillion in investments which he and some colleagues started in 1988.

Having founded an organisation that manages several times the value of the total Australian superannuation system, his thoughts on the global fund management and retirement savings system are worth paying attention to.

Nest egg builder

Fink visited Australia in June 2023, following a visit just before the outbreak of COVID-19 in February 2020 and has developed an interest in the Australian system, with first-hand knowledge of the big Australian super funds and the Future Fund, which is a client of BlackRock’s.

Fink points out that the US 401(k) system, which dates back to President Jimmy Carter’s Internal Revenue Act of 1978 – which allows for employer-sponsored retirement savings schemes to which employees can contribute – only covers those workers whose employers have a plan.

The US system does not include some 57 million farmers, gig workers, restaurant employees and independent contractors, a significant percentage of its total workforce of around 170 million people.

While there are gaps in the system in Australia, particularly around the self-employed, the advantage of the Australian system is that it is compulsory – moving up to a mandatory 12 per cent of salary next year – and spans almost the entire workforce including part-time and low-income workers.

It is structured to allow portability from employer to employer, with its universality allowing most Australians to have some level of understanding of the system.

As a defined contribution scheme, as opposed to a defined benefit scheme which has been dominant in other countries such as Canada, it has the advantage of being financially sustainable over the long term.

By creating incentives for extra contributions, it has also seen the development of a retirement savings culture amongst ordinary workers where many will aim to put extra into their super as they approach retirement.

The Australian system does not strictly cover gig workers although it does apply in some circumstances, and gig workers themselves can still choose to have their own superannuation fund.

In the US, contributions are voluntary and are more open for early access to loans and withdrawals.

Under the US system, Fink points out, some 17 per cent of those who do have access to employer 401(k) plans, don’t bother to enrol in them – a fact which he puts down to them just being too busy to pay attention to them.

As Fink notes, the Australian system has meant that Australia now has more retirement savings per capita than any other country.

“The nation has the world’s 54th largest population but the fourth largest retirement savings system.”

“Of course, every country is different, so every retirement system should be different,” he says.

“But Australia’s experience with superannuation could be a good model for American policy makers to study and build on.”

Union concerns

What Fink probably doesn’t know is the concern raised in the early days of compulsory super in Australia about unions becoming involved in mandatory retirement funds.

Some critics warned that the US experience, which saw some questionable dealings with some union pension funds such as the Teamsters, is an example of what could happen in Australia.

Those with long memories might remember that the disappearance of former Teamsters Union official Jimmy Hoffa in 1982 followed concerns about what was happening with his union’s pension fund including whether it was being used to finance the expansion of the casino industry in Las Vegas.

While there has been some criticism of super funds’ money going to unions, the widespread corruption which some in Australia feared with the introduction of the union-backed super system has never occurred.

While the laws around retirement savings around the world differ widely, the same forces are at play whether it be in individuals and governments around the world as their populations age.

As Fink points out, the fact that the world’s population is living a lot longer these days – and thus needs to finance a much longer period of retirement – is now focusing the minds of policymakers around the world.

In the US, he says, around 20 states, including Colorado and Virginia, have brought in retirement systems to cover all workers, even if they are gig or part-time.

Fink argues that there needs to be a move towards an Australian-style compulsion for employees to enrol in their company’s system.

Next year, he says, new federal law will require employers who set up a new 401(k) scheme to automatically enrol new workers. Many big companies such as BlackRock already do that.

Playing catch-up

Countries in Asia have been well behind but as their populations also age their governments are scrambling to catch up.

The Japanese Government has launched the Nippon Individual Savings Account to encourage more people to save for their retirement.

China has introduced its own basic public pension system to be financed by employer and employee contributions, with a new supplementary pension plan, similar to 401(k)s now being offered by some employers.

In 2022, the government also launched a system of individual retirement accounts or voluntary pension accounts, like the US IRAs.

The virtues of the Australian system were also pointed out last year by the UK Chancellor, Jeremy Hunt.

Speaking at a summit for global investors in London last November, which included representatives from industry super fund investment vehicle, IFM Investors, and Aware Super, Hunt cited the Australian superannuation system as one the UK should seek to learn from as it seeks to reform its own pension sector.

Hunt pointed out the advantages of the Australian system as being mandatory, with its defined contribution basis allowing for potentially higher investment returns than UK-style defined benefit schemes which promise a minimum income.

He also cited the strict rules around preservation in Australia which mean there is more money at retirement for workers and allows super funds more flexibility to make longer-term investments.

He also praised moves in Australia to consolidate superannuation funds which he argued helped improve overall returns.

But he argued that emulating the Australian system is not just a matter of “cut and paste” to the UK system.

It is a sign of the times that while British funds once financed the development of colonial Australia and beyond, it is now the big Australian super funds that are now investing in big projects in the UK- with their investment dollars being courted by the likes of Hunt and his colleagues.

While there is much to be done to improve the Australian system, with the chair of the Australian Prudential Regulation Authority, John Lonsdale, flagging that APRA is taking a closer look at the role of super in the stability of the entire financial system, the system has served Australia well and needs to be protected from being seen as a honeypot by politicians to solve other policy problems.