Defined contribution: A global perspective

Superannuation executives at the ASFA Conference have learned of the challenges facing other defined contribution pension systems around the world.

Kicking off the second day of the ASFA Conference in Melbourne, Challenger retirement income chair Jeremy Cooper led Financial Services Council New Zealand chief executive Richard Klipin and president and chief executive of the United States' Employee Benefit Research Institute Lori Lucas in a discussion about the similarities and key differences in the defined contribution systems of Australia, New Zealand and the US.

Presenting first, Lucas said it was remarkable how many commonalities were shared between the pension systems of Australia and the United States. However, Lucas outlined the difficulties facing the nation, including issues of adequacy. Even Americans - who have a full career of eligibility in a 401k plan - will face a deficit in the amount of money they have to spend in retirement, she said.

"And that's because unlike you, we don't have a mandatory system in the United States," Lucas said.

"People are not defaulted into their plan at 9.5%, they're defaulted in at a much lower percent. And not everyone's covered by plans in the United States.

"Those are the key problems that we're facing, along with the fact that people can take their money out of their plans as they switch jobs."

Lucas said leakage was an issue in the US - with people withdrawing or taking loans from their retirement savings - but not the biggest.

"The big problem is people have many, many jobs during their career. Each time, they have the opportunity to take their money out. It's taxed and there's a penalty, but still they do it. And that creates a problem with them amassing money that's sufficient for retirement," Lucas said.

Lucas added that rolling over retirement savings between 401k plans when changing jobs is actually among the most difficult things to do in the US pension system.

Financial Services Council chief executive Richard Klipin then revealed the secret to New Zealand's pension system was to keep things simple.

"The New Zealand retirement system, the financial system is in many ways a creature of its culture, and that culture is one of keep it really simple, make it really easy for people to access and understand and then people can on engagement," Klipin said.

"And that kind of translates into the way in which superannuation is funded and collected. So we've avoided a lot of the issues that are happening in more mature markets."

Klipin said New Zealand's system - which sees New Zealanders combine a non-means tested pension, savings through KiwiSaver and their own assets - had led the nation down a separate path to Australia so far.

With just $60 billion in KiwiSaver at the moment, Klipin said New Zealand would probably consider itself a nation of property investors, rather than a nation of savers in the way Australia - with its $2.9 trillion super system - does.

"So there's that kind of inflection point where the system starts to just go where the compound effect of investment returns start to play," Klipin said.

Klipin, an Australian, said that knowing Australia's system and where it had come from leads him to believe New Zealand isn't far from developing a nation of savers.

"You watch what's happening in media, you listen to conversations on the street KiwiSaver is becoming a much more day to day conversation rather than just an industry specialist conversation," he said.

Klipin also said New Zealand was struggling with issues of decumulation in much the same way as Australia, though pointed out there was no annuity provider in New Zealand, unlike Australia.

Read more: ASFA ConferenceKiwiSaverFinancial Services CouncilRichard KlipinEmployee Benefit Research InstituteLori LucasChallengerJeremy Cooper
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