Small pots: does Australia’s stapling model provide the answers?

Mike Ambery: Hello and welcome to the latest episode of Thinking Forward with myself Mike Ambery, where we explore the trends and developments affecting the UK pensions industry. Today we're talking all things Australia. As some of us may know, it’s viewed as a mature market and one that we might consider learning from or emulating. 

This discussion is over a series of episodes, with today's focus on pot for life and what we can learn here in the UK and from Australia's stapling model. I'm really grateful to John Greenwood, Editor of Corporate Adviser, Paul Leandro, Partner at Barnett Waddingham, and Femi Adigun, Senior Leader in Proposition Management and host of the Friday Drop, from Standard Life. 

So, John, Paul, Femi, really pleased to have you here and have debate with you today. In terms of Australia, they don't suffer from small pots and employees have more to say over the choice of pension fund. It's fair to say employee's super accounts or pots are staple to them and sort of follows them around in a term that we hear magnetic, sort of following the individual round from employment to employment. Employees can remain stapled to their existing fund or can, unstaple themselves and join another and move that through as they so wish to, into a new provider, I guess. 

And I'm going to start off with, with John, if that's okay. Just in terms of that Australian staple model and whether that could be utilisable in the UK. We hear of the amount of small pots, 26 billion pounds, I think, of sort of orphan pots. Do we think that stapling would solve some of that? And do we need to explain some of the misunderstanding of what stapling actually means?    

John Greenwood: Yeah, thanks, Mike, and thanks for having me. So I think there's quite a few things tied together there. To your question, would stapling tackle the small pots challenge? I think it definitely would, because you'd have one pot for life, and, you wouldn't have the, you know, quite considerable number of pots that people in the UK have building up. And that's got obvious benefits for charges and engaging, etc. 

Whether that would also have knock on effects across the market is a moot point. And how the small pots initiative that, the small pots group is it called, is working on at the moment, can solve the small pots issue. And solve some of the problem. Is a, you know, we'll see when, the proposals come to market. But yeah, obviously having, you know, the Australian system is pretty simple. People don't have to think about everything. Everything's in one place. On the downside, if you staple to, you know, the first, company you work for, typically you'll get with them if that's a suboptimal provider. The evidence is that people don't really change. 

There are some percentage of people that do switch in, Australia. I think, was it 4% of assets switch per year was one of the stats I heard when I was out there. Within that there's a lot of frictional cost in terms of marketing out there. And I think you're getting into the sort of big question which was kicked off before the general election, where the previous administration reflecting whether we should just adopt, you know, a pot for life model. And obviously, that's a big, broad question. I won't get fully into that for now, but, obviously, yeah, stapling would help with the small pots.   

Mike Ambery: Paul, any thoughts on stapling? How that would apply in the UK? 

Paul Leandro: I think the biggest criticism of stapling is that people could end up in a poorly performing fund just because that was the fund they chose at the outset. Like in the UK, inertia is the, yeah, it's the biggest power in the Australian pension system. If stapling is going to work in UK, it could only work if we had the lifetime pots model. Now, whether or not that's a good idea, is that something to debate now? 

Mike Ambery: Go for it. 

Paul Leandro: Just explain lifetime pot as opposed to stapling. So, well, the key difference between the Australian model and UK model. So in Australia it is the individual who chooses the pension fund. And effectively, and now because of stapling, they choose that fund and they could remain in that fund all of their life effectively. In the UK obviously different model is the employer chooses, you know, from when we're talking about workplace. 

So should the lifetime pot model come to the UK? So when the proposals were first mooted, I was very much on the fence. Basically because of the experience I've had in Australia. It certainly is a simpler system. And the UK system is just too complex, both for employers and for members. And, you know, when we're looking at our legacy arrangements as well, lots for people to get their heads around. Life time pots arguably also empowers the individual more, they have more ownership over the pension pot.

And it would certainly accelerate scale, because you've got someone paying more contributions to one particular fund and across millions of people that creates huge scale, which I'm a proponent of, which we've already alluded to in previous podcasts. The main negative that I can see is just if we did adopt this, it would be a huge faff. And would, you know, is it now the right time to go through all of that hassle? 

Effectively we require brand new infrastructure. Would need, a central clearing house to be created. That would take a long time. And also, if you've got, lots of contributions being paid into a clearinghouse in and out to various providers, those contributions will have to be paid in a consistent way. Which then makes you think, well, we’ll need a consistent way of applying tax relief. 

You can't have some contributions going in gross, some going in net, some via salary sacrifice. So will that lead to simplifying the tax relief system potentially moving to a flat rate tax relief, something which we know is going to be considered as part of the pensions review. 

Mike Ambery: Thanks, Paul. Femi, huge faff or something that will increase member engagement maybe?  

Femi Adigun: Well to be honest, I could probably agree with you there Paul. I think that ultimately when we look at what we are trying to do with the pension dashboard, we are trying to encourage member interaction with our pensions. I think anything that's going to detract from that upwards battle that we have to get up to just deliver pensions dashboard is probably going to, you know, slow down that development. We need to see if that works first, what impact that can have and then hopefully potentially consider more member initiated consolidation options. I think the key thing that worries me with any sort of, I guess, consolidation exercises is marketing. Does it then just become a game of who markets themselves better, who has the best incentives? And does that member, does that customer truly understand what they're doing? Is the key question for me. 

Mike Ambery: Yeah, I'd probably say my experience in Australia is that there's no greater engagement from members than there is in the UK. So, I'm going to come on to John again in terms of what does that mean in terms of decision makers?  

The employer, as Paul alluded to before, is more of a decision maker here in terms of where their money is invested, whether they stick with the default, it also impacts them when they join a new employer. You know, what's their interaction with that employer? Is it just a payroll that says stick or twist, so to speak. Don’t know whether you've got any thoughts there on human behaviour, you've alluded to people don't really make a decision. They'll go with the flow, but. 

John Greenwood: Yeah, I think, I would liken the situation to I mean, pensions is sometimes considered a utility. You know, you're required to have them by law. You know, the plumbing is there when you join an employer. But with pension, workplace pensions, we actually do have very low charges. And we have, you know, we have consultants such as Barnett Waddingham sitting there giving providers such as Standard Life a very tough time with a lot of others in a beauty parade. 

And the pressure is on you guys to really, you know, bend over backwards and do your very best to be brilliant. And when you've got an individual deciding which super they want to go to, you haven't got that competitive pressure to the same extent. I would liken it to the energy market. We're all spending every, every year or so Saturday morning switching energy provider. We don't really know what we're doing if we haven't got a computer, if we're not financially literate, we don't do it. 

You know, if we can't say very well, we don't do it. And, does anyone really know if they're in the best energy deal right now? I know that I don’t, but I do like the idea of having somebody purchasing on my behalf. I wish there was somebody buying my electricity along with 10,000 other people. 

So that's the one, purchasing choice decision that I think is a benefit from what we've got. And also you've got the employer’s advocate. What I did glean from my time in Australia was that there's little or no employer engagement at all. And we all know in terms of, behavioural, presenting, you know, digital and other, you know, solutions to people that the employer is one of the trusted channels. 

So an employer that's had something validated, if they’ve validated something for you you're more likely to trust than something that you have to go and find yourself. So I think there's a risk of losing some value there that's been built up in terms of employer buying to schemes. But at the same time, it's, you know, it's fair to say that the Australian system, does address some problems. 

The other point to make is that they are so much further down the line than we are. And the regulation of their schemes is so much tougher than ours. So right now, I don't think we could do it because, we need a second round of master trust or GPP authorisation before we could actually say that people have got authorisation now, a fit for people to be stapled to. We haven't got that. The decumulation options that people have got are all over the place. Some providers who, if you take a single penny after page age 55, you have to leave the scheme that you know, that couldn't be that couldn't be something that you'd want to staple people to, to be honest. So, that would just be unfair. Whereas their systems are a lot more uniform. 

They’ve got one regulator. We've got two. We don't have a unique identifier yet. We hopefully will do with the dashboard. So yeah, to Paul's point, we've got a lot of things in the in tray to get through before we do something like this. Maybe this will be something we'll look at in 10 years’ time. And people always say, yeah, you should start planning now. If we start planning for this now, when we've got all of these other plans, that we've already got scoped out that we haven't fulfilled yet, then I think we're just going to end up doing nothing. So too early for this.  

Mike Ambery: Femi, I'll just ask you about employee behaviour or member behaviour. Consumer behaviour, if you will. If you think consumers in the UK would be ready, educated, or do you think, and then I’ll come to Paul for this question, over the use of, you look to an employer, you look to somebody, as John said, somebody paternalistic or with the requisite skills to be able to research and understand what's required, which hopefully I paraphrased okay for John there, do you think employees are ready for that at all? And do you think it doesn't really exist right now?   

Femi Adigun: Yeah, I guess, to be honest If I had my mum in the room, she’ll probably tell me, grow up Femi and take control of your life. But I think, look, you know, you’re 100% right John. Like I'm having to go through that selection of looking at my energy provider. That's an enormous strain. Then there’s water providers. And it just goes on and on. 

And now I'm being told at 28 that potentially I could have to pick my pension provider. There's just too much to pick from if I'm being quite frank and, you know, the next thing is I think consolidation will help, you know consolidation there's fewer options. 

But there's still going to be choice overload. If I did want to pick someone, and I think, I think probably a better solution actually is more providers should be able to link your accounts based on whether that be your National Insurance number. Because if we do go from having, let's say, 30 providers to 10, hopefully you would have less pots with providers, or between providers. And they can link them on their internal system. So I think it's just putting too much onerous on members, on customers, on people to make the right decision. 

Mike Ambery: Brilliant thanks Femi, John?  

John Greenwood: And if I could make one other point on that, which was an important thing that I'd picked up in Australia was, you know, as a former national personal finance journalist. In Australia, the main players, are all not for profit, profit for member providers who were on the side of the member. No disrespect to the, the likes of Standard Life and other you know, profit based companies, but the objectives of those, profit for member providers is to give the very best outcome. And for their members. So that is another key difference. They were all set up by the unions in the 1990s. 

Mike Ambery: That makes sense. Paul, I'm going to ask you, in Australia, the role of employers, in my opinion, is really diminished in terms of selecting a super provider. Equally, the role of consultancies seems to be diminished. In a similar vein, I'd hate for the UK to go down that pathway. There's due reasons for why we shouldn't do that and I don't know whether you agree or disagree. 

Paul Leandro: So can I just pick up on the profit for member point? Yes, I agree, that's what they say. But with this was a very key observation that we had when we went to Australia. Is the amount of money which is spent on marketing. To help that individual with the choice. But you have super funds sponsoring sports teams, major sporting events. They're on the telly all of the time. 

So a lot of the money which is generated by members assets goes towards attracting new members, not necessarily going towards, you know, getting the best outcome for the member. From the. Yeah. So the employers, Employers’ volition and paternalism around pensions. I agree Mike in Australia it's not a thing. They have to comply by paying contributions. They have to choose a default arrangement. 

You know, if an individual doesn't choose, then they get into the employer's default arrangement. But the role of pensions manager, doesn't really exist. The role for independent consultants to advise employers on what that default arrangement should be. There’s some there. But it's no way is as prevalent is in the UK. So yeah, I mean, I think if we did adopt a life time pot model, you could see that as a direction of travel for the UK market. I'd sound like a turkey voting for Christmas if I was a massive proponent of the lifetime pot model. But I would say, you know, purely from observation, that is a direction of travel for the UK at the moment. You are seeing, you know, regulations ramping up from, you know, in terms of trust based schemes. 

You know, the final nail in the coffin has already been hit for a lot of those schemes. So you've seen the consolidation in the flow of assets to master trusts. And then employers are then you know, rather than spending a lot of time having risk on the table operating a pension arrangement. They move to a compliance only model. So yeah, John, I agree, you know, for your large employers, paternalistic employers, you know, they have the purchasing power from many employees and they spend a lot of time choosing that pension arrangement. 

It's not quite the same story for smaller employers, SMEs, you know they have an auto arrangement scheme in place. It’s a compliance play but are they necessarily spending time governing that arrangement and making sure that it is fit for purpose and that it compares well against market. 

John Greenwood: And could I add a point there. I agree with that. And I think in the FVM consolidation, I think it's quite important that when they're looking at these cohorts of members and their outcomes, you could have somebody with £200 in three different auto enrolment providers. That have got an admin charge, of 24 quid a year. So you could have 75 quid charges on 600 pounds worth of assets, which is a lot of money. And that individual would be better served in a single pot. 

Mike Ambery: Perfect. Thank you. I’ll do one final quick question. If it's okay. And Paul, you alluded to this and I'll start with you in terms of the word faff earlier, which I like as a collective description term, which I'll call financial wiring, plumbing, other areas where I think Australia has been able to enact stapling model because they've developed that wiring and plumbing sort of mechanisms, a sort of banking like administration clearing network, which is quick and easy to transfer money, data, records, etc., etc. 

I guess the question will be is with all of the considerations, and I think there's a lot of other considerations before we move to this sort of model in the conversation we've had. But if we did that, is it worthwhile? Do you think it'd be easy to do? Or you know, it's probably explaining your word faff.  

Paul Leandro: Yeah. Okay. Well, it won't be easy. And I think it depends on. Yeah. How we, how we approach this. So again, anecdotally we can look to Australia, you know, when, when they were building the system. At that point they looked towards the industry for creating the infrastructure, creating the clearing house. And nothing really happened, for a number of years. 

And the government had to step in, and had to build it themselves, and did it in a couple of years. I think it depends on how. Yeah. If there is a change afoot, the government would need to take it seriously. And there would have to be a lot of central resource committed to this. And it would have to be a lot of enforcement, you know, making the providers do things. From the lesson from Australia. 

It seems as if it needs to be a government led initiative with government resource, rather than let providers to their own devices team up and come up with something. 

Mike Ambery: And I'm going to guess that's less of a priority with other things. Well, from reading everything that's going to be looked at during the pensions review. I agree and you know, my key issues I think are not being addressed properly.  Hopefully there will be as part two of the review is adequacy and getting the retirement framework right. I completely agree. Femi, I don't know whether you have anything else to sort of add in terms of that faff or do you think of the time and money should be spent elsewhere? 

Femi Adigun: I'd say probably we should spend it elsewhere. I think one thing I'm definitely concerned about and probably need clarity from yourself So we're talking about scale, but I can't help but think scale is going to then move around. And what does that mean from an illiquidity private market assets perspective and how we manage that.  

And I think that's still got to be worked through, isn't it? Before we can truly understand what’s to come here, you can see that there's probably going to be a lot of change, to come. But as you said, Paul, there's conflicting priorities, I would say. And that at retirement pieces, probably one of the most important. 

And we already have things in train. You know, the direction of travel is towards consolidation and a fewer number of providers in the market. Yeah. I mean, there can be interventions put in place to accelerate that, but do we need to accelerate that now when there are other problems to solve. John, have the final opinion, if you will?   

John Greenwood: Well, just one other observation on the faff or the complexity so for things, solving one problem, then creating and maybe not another problem, but another issue to deal with is like so do you have to then, do you allow payments to go to SIPs and SASs so individuals can choose where their money goes? Then do you have to have a performance test for them as well? Do you have to have them authorised as well? Will you get a load of new app based players entering the market? How do you police all of that? And ultimately, where will that take us? So it could spiral into something that we don't yet understand. 

Mike Ambery: Completely. Paul.  

Paul Leandro: Well, spiralling into something that we probably could understand if we focus on it more. So the best kept secret, I think, of the Australian system, which no one ever really talks about when we talk about comparing our system to Australia. I think it's now I think it's just under 30% of the Australian market is investing in self-managed super funds, which is akin to SIPs and SASs over here. So people have consciously taken money out of the, how the industry funds how, yeah, the wholesale market to manage the money themselves. Could that be an unintended consequence in terms of where we're heading in the UK? 

Femi Adigun: Why have they done that though? 

Paul Leandro: Is it the funds are just lacking innovation or? It stems from, the credit crunch or what they call the global financial crisis, the GFC, where individuals thought, I can quite happily lose my money myself rather than give it to somebody else to lose. And you had basically a battalion of accountants, who are in individuals’ ears to say, why don't you move the money out system into your own fund, into which you can invest in, you know, chattels, property, you know, and you have that control. And it's very easy to set up a self-managed super you just sign a piece of paper.  

Mike Ambery: Fantastic debate. I'm going to say thank you to Femi, to Paul and to John. Thanks for joining us today for this episode of Thinking Forward. As always, let us know if there's any other topics you would like us to cover in future episodes, and you can catch up on previous episodes on our website. Just search Standard Life Thinking Forward.