The Australian Experience Financial Market Convergence – Implications for Regulators and Regulatory Structures Regulatory and Supervisory Issues in Private Pensions and Life Insurance Craig Thorburn +1 (202)

Recent History Australia has long had a lump sum mentality but this is changing The advent of a productivity related contribution to superannuation led to a sea change in the provision of retirement incomes. –Contribution oriented and part of employee entitlements –Vastly increased coverage –Cemented a role for ‘union schemes’

The Superannuation Guarantee Built on the productivity contribution to increase second pillar Union schemes became industry schemes Current debate on the need to further increase the rate.

The Taxation Regime Taxed on a t-t-t basis. Contribution based taxes introduced and increased. Most recent ‘Surcharge’ gets close to marginal rate taxation of contributions.

Increased interest with increased balances As balances accumulate, members have taken more interest in their account values Investment options now common Increase in propensity for those with larger accumulations to establish their own or family funds

Defined benefit schemes? Taxation basis is particularly complex to apply Corporate support for the costs has withered Collective membership pooling has been eroded with move to deferred pay attitude Most schemes closed, minimal DB membership remaining is mostly in the public sector

Retail Superannuation Self employed and small employers make extensive use of individual and grouped retail products Strong ideological bias away from ‘union schemes’ still exists in this sector Promoters prefer to target business owners rather than employees

Scheme numbers

Group versus individual provision Significant increase in individual control in all schemes Employers have sought to limit their role Members seek greater choice and control

Costs and Benefits Retailing costs are substantial compared to the low cost industry funds and have hampered the success of retailers

Investment Results Defined benefit funds have the highest long run returns as they take greater volatility risk, making use of substantial surpluses and the underlying employer guarantees Retail funds are competitive before deduction of costs but less so after all costs are considered Industry funds offer good returns with low costs Self managed funds offer lower returns and costs but full control

Guarantees Trend toward products with lesser guarantees over time. –Away from DB –Capital guarantees –No guaranteed rates –Annuities less attractive in a low interest rate environment – market linked income streams strongly favored.