Labour is exploring Australia’s pension model as a potential solution to Britain’s retirement crisis, an expert has confirmed.
However, experts have warned that adopting elements of Australia’s system, particularly means-testing, could pose significant risks to UK retirees.
Chancellor Rachel Reeves launched the first phase of a sweeping pensions review in November, aimed at boosting returns for savers.
The review comes as the Government grapples with an annual state pension bill expected to reach £137.5billion in 2024-25.
Mike Ambery of Standard Life, who has knowledge of the consultation, cautioned that such reforms could potentially worsen Britain’s retirement crisis.
One in five people aged 66 or over currently rely on the state pension as their only source of income, according to Royal London.
Under Australia’s system, employers must contribute 11.5 per cent to workers’ pensions, nearly four times the UK’s mandatory three per cent employer contribution.
British employees must contribute five per cent of their salary, while Australian employee contributions are voluntary on top of the higher employer rate.
The Australian rate is set to rise further to 12 per cent in July, highlighting the growing gap between the two systems.
One in five people aged 66 or over currently rely on the state pension as their only source of income
GETTY
Ambery said: “Around 95 per cent of Australians have a defined contribution pension and the Compulsion Act 1992 has embedded auto-enrolment.
“Crucially, it has guaranteed a high employer contribution rate and this is set to rise again in July to 12 per cent, with employees able to contribute on top of that.
“This has resulted in pot sizes two to three times larger at retirement in Australia than in the UK. We need to help Britons with a defined contribution pension build a more substantial savings pot for retirement.”
Australia’s system has also tackled the issue of tracking pension savings, with more than 85 per cent of Australians having just one pension pot that follows them between jobs.
In contrast, the UK has £31bn sitting in “lost pots” across multiple schemes. The UK’s state pension operates on a “pay-as-you-go” basis, with today’s workers funding current retirees through their taxes.
Ambery said: “I tend to think having one pot is a very good idea. The UK Treasury can facilitate this consolidation and the pensions dashboard will help, but that’s some way off, though we could solve the problem quite quickly by having individual consolidation.”
By 2045, the number of pensioners is projected to rise from 12.6 million to nearly 16 million.
The worker-to-pensioner ratio is expected to fall from 3.2 workers per pensioner in 2012 to just 2.5 by 2045.
State pension costs could account for more than eight per cent of GDP by 2050, up from the current five per cent. Without reform, the Government faces difficult choices: increasing taxes, cutting other public services, raising the state pension age further, or introducing means-testing.
Australia’s means-tested system, by comparison, represents just 2.5 per cent of GDP, with only 60 per cent of retirees receiving the Age Pension.
Their means-testing system has drawn criticism for its complex application process, with forms containing over 200 questions.
Ambery warned: “I don’t think it would necessarily work here, even though it was mooted prior to the last Budget.”
He highlighted that while means-testing might produce cost savings, the “administrative process of applying is very labour-burdened, as evidenced in Australia.”
The system also poses risks for late applicants, with over half of Australians missing deadlines and payments not being backdated.
There are further concerns about retirement spending behaviour in Australia, where pensioners often struggle to use their savings effectively.
Ambery added: “Australians have difficulty spending their retirement savings, tending to leave some for a rainy day and then that rainy day doesn’t come.”
The expert stressed that greater education for consumers at retirement is crucial to prevent poor financial decisions.
Labour’s pensions review has faced mounting criticism over delays to its crucial second phase, which would examine whether people are saving enough for retirement.
The Chancellor has indefinitely postponed this part of the review, drawing accusations of being “cowardly” from industry professionals.
Reeves has already attracted controversy for not ruling out forcing pension schemes to invest in UK assets, despite expert warnings about increased risks.
Ambery said: “Experts around the industry have suggested we need to do something as soon as possible. Any delay pushes an issue further down the road.”
He warned that three in five people might have inadequate savings at retirement by 2040. The Government declined to specify a timeline, saying only that details for phase two would come “in due course.”