As Ireland trundles ever closer to the implementation of Auto-enrolment there has naturally been a lot of discussion on the experiences of a similar process in the U.K. We can also learn a lot from Australia’s pension market which has transformed drastically in the last 20 years. Australia boasts the fifth-largest pension market in the world, with assets under management of AUD 3.5 trillion (EUR 2.3 trillion) at the end of 2022.
Rather than forcing employees into the mandatory contributions, the Australians have only mandated employer contributions. This compulsory contribution is set at 10.5% of gross earnings, including commission, bonuses and shift allowance and it is due to rise to 12% by 2025. There’s an additional 4% voluntary employee contribution.
The industry in Australia has seen a huge amount of consolidation in the past 2 decades, the Regulator has applied pressure on nonperforming funds to either merge or close. The intention was to reduce the investment options available within the sector, previously around 2,500, to simplify the decision making process for investors.
In 2021, new reforms were introduced including an “annual performance test” for funds. Despite the name of the test its sole focus is not on performance, as fees and charges are a huge driver. The test examines return after administrative and investment fees. In August 2021, thirteen funds with a combined value of AUD 56bn failed the performance test. Two of these funds were run by Commonwealth Bank that has one million pension savers. The funds had to write to their members informing them of the underperformance and inviting them to use an online comparison tool run by the government.
Ireland has a legacy issue of pension investors with multiple pots, the U.K. has a similar issue that has been exasperated by the introduction of auto-enrolment. Australia have an auto-consolidation initiative which has helped to address the problem. Their policy puts an onus on employers to ask new employees if they have an existing fund, and then contribute into that fund. There are obvious issues with that type of a system in Ireland, from a logistical point of view from the employer and also a value for money point of view, as legacy pension schemes can have very large fees attached. That being said any initiative that will help pension investors consolidate their schemes is worth investigating.
Another good idea from Australia, that has not come into effect yet, is the ability to allow first-time home buyers to access a portion of their pension pot to assist them get on the property ladder. This was a policy proposed by the Liberal-National coalition in the run up to the 2022 election, which they lost. With the focus on housing affordability in Ireland this type of creative solution may engage younger people with pension saving.
Overall, the pension reforms in Australia have been mainly successful as has the implementation of auto-enrolment in the UK. Obviously both systems have their flaws, but it will be interesting to see what the Irish market looks like in 2026 after IORP II and Auto-enrolment have bedded in.
Author: Eoin Hassett, Trustee Services Director, ITC Group.