The above talk was given by John Piggott (University of New South Wales) at the 2014 Pension Research Council Conference; Steuerle spoke about his research into Australia’s “atypical” retirement system, how it compares to the United States’ system, and the lessons that can be learned from the comparison.
The New Jersey Division of Investment, the arm of the state government that manages and invests pension assets, is pulling $100 million out of U.S. real estate and shifting the money to a fund that invests in Asian real estate.
The fund will invest in real estate in China, Japan, Singapore and Australia. More details from IPE Real Estate:
The New Jersey Division of Investment is pulling capital out of two core US real estate funds and redeploying it into an Asia-Pacific property fund.
New Jersey is redeeming all of its $91m (€73.2m) interest in the AEW Core Property Trust as well as a partial redemption from its $400m interest in the CT High Grade Partners II fund.
The pension fund has approved a $100m commitment to SC Investment Management’s Real Estate Capital Asia Partners I, which will be funded by the two redemptions.
Following a recent recovery in US real estate prices, New Jersey decided to rotate capital from existing managers to new opportunities. Over the past several months, the pension fund has been evaluating core investments it made between 2006 to 2008.
New Jersey is seeking to capitalise on sustained occupier and investor demand in Asia Pacific, driven by long-term demographic and urbanisation trends in the region.
[…]
SC Invesmtent is targeting a 9% return by investing in undervalued, under-managed and distressed properties where value creation opportunities exist.
According to New Jersey, SC Investment has been a consistent top-quartile performer. In the manager’s previous investment funds, deals generated a 35% gross IRR and 2.1x return, with proceeds of $600m.
The Division of Investment manages $81.22 billion in pension assets.
Pension funds are becoming increasingly allergic to fees eating into their returns, as CalPERS demonstrated this week when it announced a decision to cut hedge fund investments by 40 percent. But the United States isn’t the only country where this concern is taking hold. From the Financial Times:
Australia’s highly regarded private pension system faces sweeping reform following a sharply critical report into the fees charged by superannuation funds, which manage $1.8tn ($1.7tn) of assets.
Although Australia has the fourth largest private pensions savings pool in the world, the operating costs of the country’s superannuation funds are among the highest in the OECD, leaving scope for significant improvements in retirement incomes.
Fees should be cut by an average of 40 per cent (or 38 basis points) across the entire superannuation sector, according to an interim report released last week by the Murray inquiry, chaired by David Murray, a former chief executive of the Commonwealth Bank of Australia. This would deliver savings of about $7bn ($6.6bn) a year from annual running costs of $20bn ($18.8bn), boosting the average retirement payout by $40,000 ($37,574).
“There is an opportunity for innovation to deliver better outcomes for retirees and to better meet the needs of an ageing population,” said Mr Murray.
The report called for a “fundamental change” in the way the country manages its assets. It urged Australia to look at other parts of the world for ideas. From FT:
The report suggested Australia’s government should consider following the example of Chile and auction the right to manage default funds for all new pension accounts to the lowest cost provider. Fees charged by successful bidders in Chile have fallen 65 per cent since this approach was introduced in 2008.
The report also urged the government to consider introducing some form of compulsory deferred annuitisation that would pay out after the age of 85 – just as the UK is abandoning near-compulsory annuitisation.
The report said Australia was “unusual” in not encouraging citizens to convert their retirement savings into an income stream with longevity protection.
A “fundamental change” in the approach to asset management is required by Australia’s pension system, which focuses on maximising wealth on retirement rather than ensuring a sustainable income flow for life, said Mr Murray.
The panel that produced the report, called the Murray Inquiry, will send its official policy recommendations to the Australian government in November.
The world is now watching Australia as the country readies itself for a bold shift in pension policy: raising the retirement age to 70, which would be the highest retirement age in the developed world.
Australia’s workers had previously been able to retire at 65. The five year increase will be phased in over many years, and will take full effect in 2035. The plan was announced by Australian Treasurer Joe Hockey:
Hockey is part of the Liberal-National coalition that won power in September, pledging to end what he called the nation’s Age of Entitlement and repair a budget deficit forecast to reach $49.9 billion AUS this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing the retirement age higher to head off a gray disaster caused by a growing army of pensioners and a declining pool of taxpayers.
The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3-1 by 2050 from 5-1 in 2010. In Japan it’s already below 3-1 and in Germany it’s close to that level, according to the International Labor Organization.
“While Australia may be the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”
Australia’s 2.4 million state-retirement-age pensioners draw about $40 billion AUS a year, making it the largest government spending program. That’s forecast to rise 6.2 per cent a year over the next decade, according to an independent review commissioned by Prime Minister Tony Abbott. The program provides the main source of income for 65 per cent of retired Australians.
Failure to rein in the program would put a greater onus on younger workers to fund it through increased contributions and taxes. Raising the pension age may also mean more competition for those just starting in the workforce. Unemployment among those aged 15-24 reached a 12-year high of 13.1 per cent in May, more than double the national average of 5.8 per cent.
It’s also interesting to note the results of a recent study on retirement age:
Research shows many people struggle to work until they are 60, let alone 70. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows that the average retirement age from 2003 to 2011 for men was 62.6 years old and for women it was just under 60. While that is rising, it is still well below the current retirement age of 65.
And the HILDA data shows, for men, nearly half of all retirements are involuntary with most due to poor health. Women are more likely to retire on their own terms but still 43 per cent retire due to reasons such as ill health, losing their job or having to care for others.
The rest of the world will be happy to sit on the sidelines and watch this fascinating policy shift play out.
