Ive been to Australia 14 times since late 2012. Four. Teen. Times is how my wife informed me of this fact, which she followed with a raised eyebrow and a single word: Why?
My answer which invoked the time I chased kangaroos around a farm on an old motorbike missed the mark. Thus I was asked to go away and come up with a better explanation for all the time I was spending Down Under, and why my flights to frozen Edmonton or searing Abu Dhabi and Muscat had been replaced with long hauls to Sydney and Melbourne.
But before I can explain Australia, I need to give some context. As Ive mentioned before in this column, the entire planet is failing to prepare its rapidly aging population for retirement. For example, a 2011 study showed that only half of Americans would maintain their standards of living in retirement.
The defined benefit pensions that once provided retirement security are disappearing because of their high cost. Defined contribution plans have been shown to be inadequate because people dont save enough and often make poor investment decisions with the money they do save. The situation in the U.S. and elsewhere is dire, and that is why we need to spend time understanding a place that has managed to figure out how to prepare its people for retirement.
That place, in my view, is Australia. Its citizens save more money than people in other countries, and they invest what they save better than most.
On the saving side, Australia has built a retirement system that achieves high savings rates at a low cost to government. It does this by combining a means-tested public system with a private system that has a high mandated savings rate via employer contributions.
Today more than 90 percent of the country participates in a superannuation fund; employers contribute 9.5 percent of salaries to what are called super accounts (and that amount will grow to 12 percent in the next decade or so).
Yes, a mandate is a hard thing to pass, but Australia combined its 1992 mandate with a big tax break, which made the pill easier for conservatives to swallow. Australians had about $250 billion in superannuation savings in 1996. Twenty years later they had saved $2.2 trillion, making Australia the fourth-largest country in terms of pension assets.
On the investment side, the wall of money coming at superannuation funds has forced them to innovate lest they fall behind the pace of asset growth. As a result, you can actually find innovative pensions two words that dont normally go together in the outback. This has led to an Australian version of pension provision and institutional investment that I like. Here are a few reasons Im a fan.
Alignment: Super funds have a strong member-first orientation that puts individual well-being above everything else in the organizations. Its not just lip service. I cant tell you how refreshing it is to be in a meeting and hear investment professionals talk about members.
Efficiency: Super funds have a strong belief that the costs of professional investment management are too high. What I like most about this position is its nuance: Despite their aversion to paying too much, these funds still find ways to do a lot in the alternative-asset classes, such as infrastructure and real estate. They arent managing their assets just to minimize fees; they are minimizing fees to maximize returns.
Professionalism: The superannuation industry offers a pooled approach to investing, which offers those individuals saving in a defined contribution plan a chance to benefit from top investment talent on an aligned basis. In the U.S. most defined contribution plans are entirely self-directed, and that means people who know nothing about investing oversee them (yeah, you).
Innovation: The super funds exist in a competitive environment that sees bad funds go out of business. Thats extremely rare in this world, which generally gives pension funds a monopoly on fund assets, leaving them allergic to innovation (and thus vulnerable to private sector predations over time). In Australia the number of industry funds has shrunk by 76 percent over the past two decades; this means the funds have had to professionalize or die. Though I sometimes worry about the effect this competition has on the time horizon of investments, after five years of working with these funds I believe that the impetus to be creative that emerges from this competition outweighs any negatives.
In sum, Australia seems to have found a successful recipe for retirement success that combines high savings rates at a low cost to government with professional investment management. In my view, it is the most interesting pension and investment place on earth today more valuable as a role model than Canada or the Netherlands or the U.K. and thats why Ive been spending so much time flying over the Pacific.