Lessons from Down Under: Enhancing the UK’s DC pension system with Australian insights 

Since the introduction of the Superannuation Guarantee in 1992, which mandated a set level of pension savings for nearly all employees, Australia has developed an impressive framework to help individuals save and invest for their retirement years.

However, Australia's journey hasn’t been without its challenges. And as the UK’s DC market matures, it’s encouraging to see the flow of innovative ideas between these two countries is increasingly a two-way street.

In this first article of our series on UK-AU pension trends, we explore key insights from Australia’s DC market and how Mercer UK has leveraged these experiences to improve outcomes for members. In the upcoming articles, we’ll dive deeper into these lessons and their practical applications.

First, let’s explore the key themes and milestones from Australia’s superannuation industry that have helped shape our approach – including both UK-wide industry reforms and Mercer’s own initiatives, informed by our presence in both regions.

The introduction of Australia’s Superannuation Guarantee revolutionised retirement saving by making employer contributions mandatory. This concept was mirrored in the UK with the 2012 introduction of auto enrolment, which automatically places eligible employees into their workplace DC scheme unless they opt out.

The impact of auto enrolment has been striking: UK participation in DC schemes surged tenfold, with total DC assets increasing by 546% from 2012 to 2023. These outcomes underscore the power of defaults in driving positive financial behaviours.   

However, the experience from both Australia and the UK also highlights the importance of supplementing these hard defaults with strategic nudges. Practices such as the use of targetted videos to engage and educate members, appear to have been effective in guiding individuals toward better retirement outcomes.

Since the 1990s, Australian DC providers have incorporated private market investments into their portfolios, recognising their potential to boost long-term returns. This strategy has influenced the approach in the UK, where private markets have also begun gaining traction.

Mercer, drawing on its global experience and recognising the potential benefits for members, was an early adopter in 2017 by helping a UK DC client to make an allocation to private markets in its default strategy.

As an early adopter, Mercer was also a founding signatory of the Mansion House Compact, which encourages UK pension funds to allocate a portion of their assets to long-term private market investments. Industry consultations have also been key and we have sought to use our voice to help make private market investments a reality for UK DC savers, ensuring schemes can capitalise on the opportunities these markets offer.

"Our move into private markets was about expanding the horizon for UK DC members,” said Gail Philippart, UK DC Consulting Leader . “These investments provide unique growth opportunities that complement those of traditional assets."

Since 2004, Australian DC portfolios have increasingly incorporated sustainability considerations. This early experience has been invaluable as the UK has placed a growing emphasis on environmental, social and governance (ESG) integration

In the UK, incorporating ESG principles into DC portfolios has become essential. Mercer's 2011 study, Investing in a Time of Climate Change, played a role in shaping the dialogue that led to the Paris Agreement in December 2015, highlighting the firm’s thought leadership in climate-related investment strategies.

The use of advanced climate modelling tools has also become crucial for guiding sustainable investment decisions. The development of innovative tools in the UK, such as those assessing climate risk and transition, showcases the UK’s role as a leader in this space.

"Integrating ESG is more than just a tick-box exercise; it's about aligning investments with long-term sustainability,” said Coates. “Our focus is on making these principles work meaningfully."

As the UK prepares for legislation mandating post-retirement and decumulation services, there is much to learn from Australia’s extensive experience

Australian insights have accelerated Mercer UK’s grasp of this critical stage in the member journey, revealing that the issues at hand extend beyond investment strategies, advice or technology alone. Foremost, the Australian experience highlights the importance of innovating in retirement product design to develop better solutions that support retirees throughout their post-retirement phase.

A critical pitfall for both countries is the inaccessibility of financial advice, which could help retirees make more informed decisions. Gail Philippart at Mercer, said:

Richard Dunn, Principal in Mercer’s Sydney-based investments business, agreed: “The organisation that solves giving advice at scale, while keeping it high-quality and relatively affordable, will substantially improve retirement outcomes for members.”

The 2004 introduction of the ASFA Retirement Living Standards has been pivotal in shifting Australia’s focus from merely growing DC savings to ensuring adequate income throughout retirement. This framework has inspired the development of similar standards in the UK, with the advent of  the PLSA Retirement Living Standards, which adapt these concepts to the local context

Coates noted: "Retirement readiness involves a shift from simply building savings to ensuring they last throughout retirement. We’re focused on helping members understand and achieve this balance."

Mercer Australia has introduced its own initiatives, such as the Retirement Readiness Index (RRI). A UK version of Mercer's Retirement Readiness Index (RRI) was introduced in 2020 to further support the transition towards a focus on long-term financial security and retirement solutions that are tailored to meet members' needs.

Australia’s pension system initially relied heavily on employers to manage the rollout of DC pensions, much like the UK market does today. Over time, however, Australia’s approach evolved, with large multi-employer superannuation funds becoming the face of the landscape.

The rise of the multi-employer master trust market in the UK suggests that similar changes may be on the horizon.

But as these trusts become more prominent, the channels for distribution and member engagement are likely to evolve as well. A move towards this customer-centric model could place traditional pension providers at a disadvantage compared to banks and tech companies, which have more developed marketing and communications strategies, highlighting the need for traditional providers to adapt quickly to remain competitive.

The evolution of Australia’s superannuation system offers invaluable lessons for the UK’s DC pension market. By leveraging these cross-border learnings, the UK has the opportunity to build a more resilient and adaptive pension system.

Providers who understand and integrate insights from both Australia and the UK will be a step ahead in shaping the future of DC pensions in both markets.

This article is just the beginning of Mercer’s deep dive into the transformation of the UK DC system. Look out for more insights and strategies in our ongoing series.