Australia, long regarded as a model for global pensions reform, has some explaining to do after the markets meltdown, and not just to its own citizens.
Having forced Australians over the past two decades to trust in markets to provide for their old age — and tempted other nations to go down the same path — it is watching horrified as a big chunk of its retirement savings go up in smoke.
Last year’s plunge in financial markets has wiped out about a quarter of Australia’s $1-trillion in pension-fund savings in real terms, according to OECD data, a figure surpassed only by the vastly bigger economies of the United States and Britain.
Australian pension funds lost about $200-billion in the first 10 months of 2008, compared with $300-billion for the UK and a staggering US loss of $2.2-trillion, the data showed. Over 10 years, Australian data still shows positive returns but even local industry figures point to the worst decade in 30 years.
As a result, Australians who never dreamt of queuing up for a state pension are now doing just that, feeding a crisis of confidence in a pension model that has served as a trail-blazer for other nations around the world, from Asia to Europe.
”My superannuation [pension] fund has been trashed,” said Bob Partington (60), a former bottling-industry executive who went into semi-retirement in 2006, aiming to play more golf and live mainly on a pension drawn from his retirement savings.
”My fund has gone down between 40% and 50% … I was coming up for retirement and now I can’t retire,” he said from his Sydney home where he has started a business consultancy to help make ends meet and support a family of five.
Partington is a baby-boomer, one of the Sixties generation that is putting enormous strain on pensions systems in rich countries worldwide. He and his contemporaries are the reason Australia was among the first to overhaul its pension system about 23 years ago, shifting to a compulsory system of private savings.
He isn’t even among the hardest hit.
Call for tighter regulation
Unlike Partington, who is still not poor enough to qualify for a state pension, other Australians who amassed large sums of retirement savings now need state handouts to get by, a situation that the Australian system was designed to avoid.
The rate at which people are resorting to the state pension jumped by about 50% in the December quarter, according to the Sydney Morning Herald, from about 2 000 a week in October to 3 000 last month as Australian and global markets nose-dived.
”That’s because self-funded retirees are starting to drop below the threshold value for receiving the age pension,” said Theresa Kot, president of the Association of Independent Retirees, which is lobbying for reform of the pensions system.
The age pension, available at 65, is rationed depending on an applicant’s assets and income and it is worth up to about $740 a month. It represents only about a fifth of workers’ average final salary at retirement, according to the OECD data, which in policy terms is a sign of success.
Without a mountain of private savings, it would have to be much more. But as that mountain shrinks, the question of raising the age pension is becoming a burning political issue, along with tighter regulation of private retirement savings.
The retirees association has called on the government, which had already embarked on a pensions review last May, to ensure better regulatory oversight of the kinds of investment products that pension funds can invest in.
”Our crisis of confidence is not so much in the funds,” Kot said. ”Our crisis of confidence is with ASIC [the securities regulator] which has not been prudent in monitoring the markets and monitoring the products,” she added.
Losing the faith
Australia’s pension system rests on three pillars: compulsory savings by employers who contribute the equivalent of 9% of wages into individual pension accounts; voluntary contributions by workers, and lastly the state pension.
Many other countries have studied the Australian experience, sending fact-finding missions Down Under from Europe, Asia and South America in a search for ways to boost savings and ease the burden of ageing populations on state finances.
Britain was one of them.
It legislated last year to adopt a new pensions scheme from 2012 that carries some Australian hallmarks; namely, a compulsory savings scheme where employers must contribute into workers’ pension funds with the workers bearing the investment risk.
Like Australia before it, Britain is weaning workers off defined-benefit schemes — where employers promise to pay retirees a proportion of their final salary — and moving to a world where retirees are left with a basic state pension and their retirement savings that are at the mercy of markets.
But UK-based independent pension consultant John Ralfe said faith in the Australian model was now very thin on the ground, even though an Australian industry survey last September showed satisfaction with fund returns was still running high at 80%, down from 87% a year earlier.
”As we approach 2012, even if we are then through the recession, people will say ‘I’m not going to save 3% because I need to pay down the mortgage or I need to hunker down, and even if I do save 3% — hell — look what happens when you put your money in the stock market. It disappears!’.”
”All that will encourage people to opt out.” — Reuters