Coffee Morning - Lessons from Australia DC - Final (1).pdf

Pension playpen with Neil Maines

1. Superannuation in the sun
Learnings from the Australian DC industry
October 2024
Please consider the environmental
impact before printing this document

2. Background
2

3. Australian Superannuation Industry – The Basics
33
3
But both DC coverage
and contributions are
high – adequacy is
generally strong
The employer can
recommend a scheme
but members can (and
do) switch –
engagement is higher
than the UK.
Defined benefit
pensions have largely
been phased out
The Age pension is means
tested, primarily based on
the value of savings
(including DC savings)
The industry is becoming
increasingly politicised
There’s a home bias, but it
varies by asset class

4. Structure of the DC Industry
44
4
Australian DC Industry
Industry Fund
•Profit to member
•Trade union heritage
•Often targeted at a
specific demographic
Retail Fund Public Sector FundCorporate
Self
-
managed Super Funds
•Profit to shareholder
•Financial services /
wealth management
heritage
•Some have master
trust offerings
•Set up for employees
of an Australian firm
•Scale challenges have
meant all but the
largest entities have
merged
Examples include
•AustralianSuper
•HOST+
•Care Super
Examples include
•AMP Super
•MLC Super Fund
•Vanguard Super
Examples include
•Qantas Super
•Telstra Super
•ANZ Staff Super
Examples include
•ADF Super Scheme
•Local Govt Super
•Set up by
Commonwealth and
State governments
•Some now admit
members from
different industries
•DB legacy

5. Lessons from Australia
5

6. 1 - Member Outcomes
66
The Australian equivalent of VFM has arguably ended up detrimental to member outcomes
6
Member outcome
assessments
Heatmaps
Performance Test
Value for Members
framework
???
Internally calculated metrics across a range of areas
contributing to member outcomes and made available to
members
Regulator calculated range of metrics. Collated across industry
and made available to the public
Regulator takes one metric from Heatmaps and applies severe
penalties for failure
Australian policy UK equivalent

7. 2 - Member Outcomes
77
An industry competing on value rather than cost will support member outcomes
7
Source: Australian Tax Office

8. 3 – Private markets
88
Private market exposures have helped promote member outcomes in multiple ways
8
Return Enhancement
Incremental improvements to
expected return can compound into
significant improvements in
retirement outcomes over the time
horizon for a DC investor.
Diversification
Diversification has been critical for
several reasons including:
1)Mitigating ‘panic’-based decisions
from members during periods of
volatility
2)Sequencing risk
Sustainability
The energy transition is already
providing attractive risk-adjusted
opportunities.
Irrespective, the time horizons of a
DC investor necessitate the
integration of sustainability.
The Australian DC approach to the build out of private market portfolios has been a key success and
there’s no major hurdles to the UK adopting a similar approach

9. 4 – Private markets
99
COVID shone a bright light on private market inv. governance – we need to learn the lessons
9
Treating members fairly
Stale valuation risk
Performance fees
Liquidity management
Liquidity stress testing
Liquidity waterfalls

10. 5 - Consolidation
1010
The first signs of diseconomies of scale are starting to appear
10
Consolidation has been overwhelmingly positive for member outcomes overall, but there’s signs of
diseconomies of scale.
There’s some interesting implications for the UK given consolidation appears to be moving toward a smaller
number of providers than Australia.

11. 6 - Decumulation
1111
Australia is no further progressed, but can provide some colour on what hasn’t worked.
11
To date, there has been limited development of solutions and products that balance the above.
This has limited the ability of members to turn decent pot sizes at retirement into a retirement income.
Adequacy
Longevity Understandability

12. Additional Excerpts
12

13. Excerpts from APRA Heatmaps
13
13
Source: APRA
Source: APRA

14. Performance Test Benchmarks
14
14
Asset Class Index
Fee
Assumption
Tax
Assumption
1Australian Equity S&P/ASX 300 Total Return Index 0.05% 0.00%
2International Equity (hedged) MSCI All Country World Ex-Australia Equities Index with Special Tax (100% hedged to AUD) 0.11% 14.00%
3International Equity (hedged; emerging markets)MSCI Emerging Markets with Special Tax (100% hedged to AUD) 0.16% 14.00%
4International Equity (hedged; developed markets)MSCI World ex Australia with Special Tax (100% hedged to AUD) 0.10% 14.00%
5International Equity (unhedged) MSCI All Country World Ex-Australia Equities Index with Special Tax (unhedged in AUD) 0.09% 14.00%
6International Equity (unhedged; emerging markets)MSCI Emerging Markets with Special Tax (unhedged in AUD) 0.14% 14.00%
7International Equity (unhedged; developed markets)MSCI World ex Australia with Special Tax (unhedged in AUD) 0.08% 14.00%
8Australian Listed Property S&P/ASX 300 A-REIT Total Return Index 0.12% 14.00%
9International Listed Property FTSE EPRA Nareit Developed ex Aus Rental 100% Hedged to AUD Net Tax (Super) Index 0.22% 14.00%
10Australian Listed Infrastructure FTSE Developed Core Infrastructure 50/50 100% Hedged to AUD Net Tax (Super) Index 0.26% 14.00%
11International Listed Infrastructure FTSE Developed Core Infrastructure 50/50 100% Hedged to AUD Net Tax (Super) Index 0.26% 14.00%
12Australian Unlisted Property MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index – NAV-Weighted Post-Fee Total Return (All Funds) 0.00% 14.00%
13International Unlisted Property MSCI Global (Excl. Pan-Europe and Pan-Asia Funds) Quarterly Property Fund Index (Unfrozen) (Net Total Return; AUD fixed)0.00% 14.00%
14Australian Unlisted Infrastructure MSCI Australia Quarterly Private Infrastructure Fund Index (Unfrozen) – 50th Percentile Post-Fee Total Return (All Funds) 0.00% 14.00%
15International Unlisted Infrastructure MSCI Australia Quarterly Private Infrastructure Fund Index (Unfrozen) – 50th Percentile Post-Fee Total Return (All Funds) 0.00% 14.00%
16Australian Fixed Income Bloomberg Ausbond Composite 0+ Yr Index 0.10% 15.00%
17Australian Fixed Income Excluding Credit Bloomberg Ausbond Govt 0+ Yr Index 0.08% 15.00%
18Australian Credit Bloomberg Ausbond Credit 0+ Yr Index 0.15% 15.00%
19International Fixed Income Bloomberg Global Aggregate Index (hedged AUD) 0.10% 15.00%
20International Fixed Income Excluding Credit Bloomberg Global Treasury Index (hedged AUD) 0.08% 15.00%
21International Credit Bloomberg Global Aggregate Corporate Index (hedged AUD) 0.15% 15.00%
22Australian Cash Bloomberg Ausbond Bank Bill Index 0.04% 15.00%
23International Cash Bloomberg Ausbond Bank Bill Index 0.04% 15.00%
24Alternatives 25% of 2, 25% of 5, 50% of 19 0.00% 0.00%
25Defensive Alternatives 12.5% of 2, 12.5% of 5, 75% of 19 0.00% 0.00%
26Growth Alternatives 37.5% of 2, 37.5% of 5, 25% of 19 0.00% 0.00%

15. Registration
© XPS Investment 2024. XPS Pensions Consulting Limited, Registered No. 2459442. XPS Investment Limited, Registered No. 6242672. XPS Pensions Limited,
Registered No. 3842603. XPS Administration Limited, Registered No. 9428346. XPS Pensions (RL) Limited, Registered No. 5817049. XPS Pensions (Trigon) Limited,
Registered No. 12085392. Penfida Limited Registered No. 08020393.
All registered at: Phoenix House, 1 Station Hill, Reading, RG1 1NB.
Authorisation
XPS Investment Limited is authorised and regulated by the Financial Conduct Authority for investment and general insurance business (FCA Register No. 528774).
Neil Maines
Senior Investment Consultant
T: 0148 333 0162
E: [email protected]