Hazel Bateman

New evidence on pension plan design and administrative expenses: the Australian experience

Policymakers seeking to design efficient and smoothly functioning pension systems for their aging workforces are beginning to acknowledge the key importance of administrative expenses when formulating rules for pension plan structure and fee disclosure requirements. This study explores the links between retirement plan offerings and pension expenses for a wide range of private and public sector pension plan types, using an invaluable new data set on two thousand Australian pension funds. Our analysis indicates how pension plan design can strongly influence plan expenses and consequently eventual retirement security.

Financial literacy and retirement planning in Australia

Financial literacy and numeracy are closely tied. Furthermore, financial literacy has been shown to relate to important financial behaviors. This study examines the relationship between financial literacy and retirement planning using a measure that includes questions requiring numeracy. We implement a customized survey to a representative sample of 1,024 Australians. Overall, we find aggregate levels of financial literacy similar to comparable countries with the young, least educated, those not employed, and those not in the labor force most at risk. Our financial literacy measure is positively related to retirement planning in our sample.

Retirement Investor Risk Tolerance in Tranquil and Crisis Periods: Experimental Survey Evidence

We conduct a choice experiment to investigate the impact of the financial crisis of 2008 on retirement saver investment choice and risk aversion. Analysis of estimated individual risk parameters shows a small increase in mean risk aversion between the relatively tranquil period of early 2007 and the crisis conditions of late 2008. Investment preferences of survey respondents, estimated using the scale-adjusted version of a latent class choice model, also change during the crisis. We identify age and income as important determinants of preference classes in both surveys and age is also identified as a key determinant of variability (scale). Young and low income individuals make choices that are more consistent with standard mean-variance analysis but older and higher income individuals react positively to both higher returns and increasing risk in returns. Overall we find a mild moderating of retirement investor risk tolerance in 2008.

Financial Competence and Expectations Formation: Evidence from Australia

We study the financial competence of Australian retirement savers using self-assessed and quantified measures. Responses to financial literacy questions show large variation and compare poorly with some international surveys. Basic and sophisticated financial literacy vary significantly with most demographics, self-assessed financial competence, income, superannuation accumulation and net worth. General numeracy scores are largely constant across gender, age, higher education and income. Financial competence also significantly affects expectations of stock market performance. Using a discrete choice model, we show that individuals with a higher understanding of risk, diversification and financial assets are more likely to assign a probability to future financial crises rather than expressing uncertainty.

Financial Competence, Risk Presentation and Retirement Portfolio Preferences

Financial regulators are weighing up the effectiveness of different templates for communicating investment risk to retirement savers since welfare depends on comprehension of risk information. We compare nine standard risk presentations using a discrete choice experiment where subjects choose between three retirement accounts. Switching between graphical or textual presentations, or between formats that emphasize benchmarks rather than return ranges or values at risk, affects predicted choices more than large changes in underlying risk. Innumerate individuals are more susceptible to presentation, and those with weak basic financial literacy are insensitive to increasing risk levels, regardless of presentation. Presentation effects are moderated but not eliminated as financial literacy improves.

Decentralized investment management: an analysis of non-profit pension funds

We investigate delegated investment management in private pension accounts using data from Australian accumulation (superannuation) funds. In Australian non-profit pension funds, trustees choose investment managers on behalf of members. We find that funds with many delegated managers have higher risk-adjusted returns than those with few. However funds with 13 or less specialized managers show no improvement over funds with a single diversified manager. All do worse than a benchmark portfolio of asset-class indices. Further, by using random selection to mimic the choices of an uninformed individual choosing from the same menu of delegate managers as used by trustees, we show that returns from pension funds with large numbers of trustee-selected managers compare favorably with returns from randomly selected, equally weighted portfolios. However this improvement falls off quickly for funds with fewer trustee-selected managers, or when randomly selected portfolios are also diversified across asset classes. Results indicate that an uninformed individual following a naive diversification strategy would have done as well as most trustee boards in this sample.

Regulation of Australian Superannuation

No abstract available.

Private Pensions in OECD Countries

As most other OECD Member countries had already done, Australia has, since 1991, supplemented an existing flat-rate universal (but means-tested) residence-based old-age pension by a compulsory earnings related second tier for employees known as the “Superannuation Guarantee”. However, it was the first Member country in which the favoured format of participation in the second tier is in the form of pure “money purchase” schemes in which benefits are determined solely by the amount which accumulates in individual accounts. Benefits are predominately paid as lump-sums on retirement, although tax arrangements are being changed to encourage beneficiaries to purchase annuities. This report, compiled by two Australian experts, describes this system and its relation to pre-existing tax-advantaged voluntary provision, which only covered one-third of employees but remains predominant in terms of assets accumulated and benefits payable. The report discusses the sources of retirement ... Comme la plupart des autres pays Membres de l’OCDE l’avaient fait avant elle, l’Australie a, depuis 1991, complete son regime de retraite universel a taux uniforme (mais lie a un niveau de ressources), par un second pilier d’epargne retraite obligatoire proportionnelle aux gains pour les salaries, appele systeme de garantie de retraite. Toutefois, c’est le seul pays a avoir privilegie, pour le deuxieme pilier d’epargne, les regimes a cotisations definies dans lesquels les prestations sont uniquement fonction des sommes accumulees sur les comptes des beneficiaires. Les prestations sont la plupart du temps servies sous la forme d’un capital verse integralement au moment du depart a la retraite, mais une reforme des dispositions fiscales visant a encourager les beneficiaires a opter pour le paiement d’une rente est en preparation. Ce rapport, redige par deux experts australiens, decrit ce systeme de garantie de retraite et ses liens avec le regime volontaire preexistant auquel etaient ...

Financial Engineering for Australian Annuitants

The past few decades have witnessed a global move towards private provision for retirement through individual defined contribution pensions at the expense of publicly provided and employer-sponsored defined benefit pensions. As a consequence, workers and retirees are becoming increasingly exposed to uncertainties in financial, labour and economic markets. The contributors to this book analyse the implications for retirement income policy, workers and retirees in view of the current climate of heightened exposure to scary markets. The implications of a broad range of scary market scenarios are presented, and novel solutions prescribed. Retirement incomes across a number of countries including the US, the UK, Japan and Australia are explored.

Mandating Retirement Provision: The Australian Experience

Only three countries rely signi®cantly on what we term private mandatory saving policies for retirement: Australia, Switzerland and Chile. Several other countries, including Mexico, Argentina, Peru and Columbia, have moved in the same direction. Hong Kong plans to implement such a policy from 1999. It is probable that other countries will follow suit, especially in the light of World Bank advocacy of private mandating, and the current U.S. debate on privatizing social security (World Bank, 1994). This paper focuses on the Superannuation Guarantee, as Australias mandatory retirement saving plan is called. We begin by laying out its essential features, and offer an account of its genesis. We then critically assess its current and likely future ef®cacy. So far as possible, we try to relate the Australian experience to that of countries who may be contemplating the adoption of such a policy in the foreseeable future. The paper concludes with a description of the emphases of the current government, whose victory in 1996 is testing the robustness of bipartisan support for the Superannuation Guarantee and its cluster of related policies.