OECD’s tips for Australian super and retirement system

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One of the biggest concerns facing both policy makers and super fund trustees – a concern they at least share – is what to do about the adequacy problem for the bulk of retirees over the next 20 or more years. Australia’s retirement incomes policies and products are inadequate. The OCED had some tips for us at the AIST Superannuation Investment Conference last week.

Pablo Antolin-Nicolas, OECD head of private pensions, principal economist and deputy head of the financial affairs division, told about 400 attendees at the conference on the Gold Coast that the industry needed a combination of account-based pensions and deferred life annuities to address the retirements product problem.

This should, at least, be a default option for the majority of Australian DC (defined contribution) superannuants going into retirement, he said.

In a broad ranging address, Antolin-Nicolas said: “The main goal of saving for retirement and pensions is to have a stream of income during retirement that protects individuals against the risk of outliving their resources – longevity risk.” But the two main product types, taken alone have disadvantages:

  • Life annuities provide protection against longevity risk, but they are illiquid, rigid and individuals dislike them… Different products have different options. They can be expensive and require risk management.
  • Drawdown programs, such as account-based pensions, provide flexibility and liquidity, but lack protection from longevity risk.

“The OECD recommends a combination of account-based pensions and deferred life annuities, say from age 85. This strikes a balance between flexibility, liquidity and protection from longevity risk (tail risk). At least as a default.”

In a comparison of the retirement systems in OECD countries, Antolin-Nicolas said Australia showed a generous tax treatment of retirement savings, coming in fifth out of 35 countries studied. Australia’s estimated “overall tax advantage” from the super system was 37 per cent, behind Israel and Mexico (both 51 per cent), Iceland (44 per cent), and Hungary (39 per cent). The UK was 34 per cent, the Netherlands 32 per cent, and the US only 24 per cent.

He also discussed recent work by the OECD on the implementation of ESG strategies by pension funds. Institutional investors were generally “underweight” ESG, he said, and the OECD’s work questioned whether investment governance standards were too restrictive.

Regulation generally does not prohibit ESG integration but investor interpretations may – such as the ‘prudent man’ test for a fiduciary’s duty and efficient markets theory (everything is in the price) – may discourage ESG integration. Other factors which may make it difficult include data availability and its cost.

He said that regulations did not encourage ESG integration. There was a lack of standardised methodologies and models and different interpretations of investors’ duties.

On the other hand, ESG factors influenced investment returns. They improved the financial and market performance of companies as well as helping broader economic growth and financial markets stability.

Antoni-Nicolas said: “Meta studies confirm a positive link with corporate and stock market performance, but it’s not easy to distinguish between the ‘E’, ‘S’ and ‘G’.”

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