Pension Saving and Retirement Insecurity: The case of Australia. Mike Rafferty University of Sydney

Transcription

1 The New Paradox of Thrift -Mandatory Pension Saving and Retirement Insecurity: The case of Australia Mike Rafferty University of Sydney

2 Outline The GFC, pensions and the vulnerabilities of financialized capitalism The Australian System and Global Pension Reform Lessons from the Australian Experience

3 Paradox of thrift Australia has 9% compulsory pension savings contributions (in privately managed DC schemes) and very generous tax concessions for voluntary contributions, in addition to a PAYG public pension Now more than a trillion dollars in pension assets (more than annual GDP). Yet people are now more anxious and more skeptical than ever about retiring and about the security they will have in retirement This can be seen as part of the wider outcome of the risk transfer/ financialization of labour (Jacob Hacker, Randy Martin) It has included such things as privatization, commercialisation of public services, the increasing use if credit to suppport consumption, and has required increasing the amount of paid labour from households (Warren the Two Income Trap)

4 Australia and the New Global Policy Approach to retirement WB argument was that ageing/fiscal crisis means that old systems approaches won t work. Mandatory pillar the new direction in developing countries need to build retirement around mandatory pillar - Chile and Eastern Europe in developed economies old pension promise needs to be broken, and shift toward private funding - Australia Behind the argument is really the privatisation of an important part of social welfare (Richard Minns, Mitchell Orenstein) and the financialization of everyday life (Randy Martin)

5 Australia a leader in adoption of World Bank s privatized compulsory super Case of Australia is interesting because since the early 1980s moved a long toward making mandatory contribution ti defined d contribution ti schemes the centre of its pension financing system. Currently a mandatory 9% of all wages and salaries paid into privately managed funds, plus generous tax concessions for voluntary contributions. Now one of few countries with pension assets greater than annual GDP Originally deferred wages to reduce current consumption but promise of greater consumption (better retirement) later Bringing benefits of super from professionals and public servants to all workers Increased national saving Now public pension a safety net and mandatory super the core of retirement financing

6 Lessons a. disaggregated and b. aggregated 1.a. Agency costs in fund management are significant, and b. so are (foregone) capital stewardship issues 2. a. Reluctant (or conscripted ) fund members don t and won t discipline fund managers, and b. this can only really be done collectively by the state or workers 3. a. GFC revealed the scale of risk transfer in mandatory DC schemes and many of these risks are simply not appropriate for workers to bear, and b. raises issue about whether compulsory DC schemes should be at the centre of a pension financing system 4. a. Compulsory privately managed super a very large and poorly regulated P3 scheme b Danger that Super industry (including union-sponsored funds) becoming a political force in its own right and defining adequacy and how it is funded 13 or 15%, and non or deferred retirement (the new fourth pillar) 5. a. Issue of pension adequacy is complex in light of longevity and future income needs, and b. financial education (the Obama mantra) won t fix things it is about about reinforcing the risk shift and many workers especially low income or with broken work patterns are deferring wages for no future benefit system 6. a. Conflict and compromise at heart of retirement policy (Barr and Diamond, Minns) we need to continually ask what are the objectives that are being targeted, and consequently what is being traded off, and b. what are workers interests? Takeaway Retirement security is complex (involves labour market, health, productivity, household formation, housing, public and private services etc).and so is financing it. More (forced) savings won t necessarily guarantee a more secure and better retirement for all. Pension plans in Australia that began as a way of supplementing the age pension and offered the prospect of labour sharing in the unearned income we produce. After 25 years of compulsory super people living in more financial stress and anxiety, and is also going to asked to pay more (13-15%) and work longer as well.

7 Agency Costs in Fund Management Australia a good natural experiment in fund governance. It has two quite different models: - privately run for profit funds part of large financial conglomerates - employer based government and company schemes run on a not for profit basis - multi-employer funds run on a not for profit basis 1. For profit funds appoint trustees who are typically employees of financial conglomerate 2. Not for profit funds have tustees representing employers and employees

8 Agency costs matter Evidence from range of sources, using different measurement techniques and data all point in ame direction. Representative trustees/nfp status outperform For profit appointed trustee funds. In research we did for the Australian Institute te of Superannuation Trustees (AIST) we found returns between the two types of fund governance were between 1.4 and 2.4% per annum- which would mean significant differences in final pension benefit.

9 But what sort of trustee model? Australia has a system which is complex, and involves lots of hidden conflicts and compromises. One way of thinking about the tensions in fund management is to ask what sort of fund member we have Investor (in a pooled investment vehicle) Beneficiary (of a trust), and Citizen (in a PPP fund charged with delivering retirement financing) The difference between each model is non-trivial Lesson: Agency costs matter and many tensions embedded in system

10 Trusteeship and agency costs In Australia trustees have a fiduciary duty to members, and has produced a very conservative hands off approach to investment, corporate governance, ESG labour and human rights. BUT, funds provide and charge for: Financial advice (including trailing commissions) Insurance (life, income protection TPD) Advertising Other services

11 Choice with Reluctant Members Regulatory model In Australia assumes informed and active investors. The job of fund members is to discipline fund managers to deliver for members best risk adjusted returns at lowest cost. Therefore members now have Choice: of fund and fund option. But know that there is very little switching, and research shows very little relationship between performance and fund flows - we found size of fund better predictor of flows than any other factor. Lesson: can t rely on market governance (fund members) to discipline fund managers ie regulation pension design and internal fund governance (trustees etc) becomes critical Financial education won t work - it will as researchers from Austrian Central Bank have argued is about sending a message that risk management is now idnividualised

12 Labour and Mandatory DC schemes In Australia, trade union were critical to the development of mandatory DC pension system May have begun as a supplement to public system. But now becoming the core of the system. Now with GFC and system maturity projections showing that current system won t deliver better and more secure retirement that public pension Increasing recognition that relying on it to deliver base load retirement power will not work Unions have been leading calls for move mandatory contributions from 9% to 13-15% 15% contributions. More deferred income for the promise of financialized private retirement. AND government has added 4 th tier to retirement policy non- retirement (working age moving up from 65 to 67..to 70.

13 Retirement Policy - Conflict and Compromise. Multiple objectives of any retirement system Consumption smoothing Longevity insurance Production Distribution Labour market Volunteer/care sector Fiscal sustainability? Multiple objectives means tradeoffs or conflicts which need to be recognize (Barr and Diamond 2008) Lesson: Need to ask and answer question what are the objectives being maximised i in the system?

14 DC Investment Risks - Volatility

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