Reflections from an Aussie in Washington DC

Last week I had the privilege of participating in The SPARK Institute, Inc. / Defined Contribution Institutional Investment Association (DCIIA) Public Policy Forum 2024 in Washington. During a panel discussion, Brendan McCafferty, Ali Khawar and I explored the differences between the Australian super system and those in the UK and USA. Karen Biddle Andres expertly moderated the panel.

Grateful to Stephen Huppert for the intro, and to Tim Rouse and Lew Minsky for the invitation.?

On a personal level, I was reminded of how blessed I am after encountering a brave mother on a flight to LA. Her story of returning home to bury her younger brother, finding out about her daughter’s genetic disease, and fatal cancer diagnosis in her partner’s family, put my misfortune in 2024 into perspective, emphasizing the immense gratitude I have for the life my family and I get to live.

Here are my key takeaways from the trip. Sorry it's a little long, but there's a lot to cover...

1. ERISA (Employee Retirement Income Security Act of 1974) in the US is a 50-year-old federal law that covers voluntary retirement and health plans.?ERISA focuses on the income tax effects of transactions for retirement (and health) plans and is primarily enforced by the Dept. of Labor and the Dept. of Treasury.?A dedicated focus on pensions and retirement, covered by our Dept. of The Treasury (Financial Services) or the UK’s Dept. of Workplace and Pensions, appears to be missing.
2. The US retirement system encompasses a multitude of account options like 401k, 403b, 457, IRA, PEP, etc., each with unique features. The inclusion of pre/post/tax-deferred savings, social security, and other saving methods for education and health further amplifies the complexity.
3. About 70% of workers in the US have access to retirement plans, but only 60% choose to participate. The US retirement system is not mandatory, and any move towards making it so would likely face intense opposition. Several states have adopted an auto-enrolment approach inspired by the UK's system. Under this model, employers are mandated to offer retirement plans, but employees can opt out.
4. In the US, fiduciary obligations rest with employers as trustees of their employer fund, unlike in Australia and the UK. This unique structure presents challenges as employer fiduciaries tend to be risk-averse, leading to limited investment in unlisted assets, low product innovation, and the responsibility to interpret and oversee the implementation of regulatory changes. These measures aim to reduce litigation risks in an environment known for high levels of litigation.
5. In the US and UK, there is a low appetite for unlisted investments such as PE, infrastructure, and property. In the US, this is largely due to employer fiduciary responsibility and the resulting risk aversion. However, the UK is experiencing a shift with a growing appetite for such investments, supported by government encouragement.
6. Despite all this, the US retirement system holds over $35 trillion in funded retirement benefits, representing a significant pool of capital available for productive use.
7. Like Australia and the UK, current regulatory and industry discussions in the US are centred around challenges like coverage, adequacy, equity, decumulation, and engagement. While the US likely leads in decumulation products integrating longevity, risk management, and more, provider deployment faces obstacles due to employer fiduciaries. Could this present an avenue for cross-border collaboration?
8. Simulated investment returns generated through machine learning and predictive analysis may exhibit upward bias due to reliance on historical data. As markets and businesses adapt to changing conditions over time, the signals used by machine learning models may become outdated, potentially leading to an overestimation of investment performance.
9. One large global bank has allocated significant resources to technology, with approximately 50,000 employees and a tech budget of $17 billion USD. About 2,000 employees are specifically dedicated to AI. This substantial investment enables the conduct of approximately 300 concurrent experiments worldwide, targeting various aspects of their operations spanning front, middle, and back-office functions.
10. To trust AI-generated content with consumers, eg members ‘conversing’ with a predictive AI chatbot, consider using a closed system with proprietary training data to reduce the chance of the machine hallucinating.??However, you would also need to prepare for increased demand for calls to humans and need to work out where machines stop, and humans start.
11. Blockchain (still) appears to be a technology solution looking for a problem to solve.??One application of blockchain could be to act as a connected clearing house to simplify and expedite transactions (eg trades, rollovers, withdrawals, etc) in a pension system.??However, we don’t need to wait for blockchain to achieve this, given we have been running Super Stream in Australia since 2011!??Maybe blockchain is a suitable technology for Super Stream 2.0?

As professionals working in/around Australian superannuation, we should be so thankful for the decisions taken decades ago when designing a relatively simple system.??Despite this, there are areas for improvement that the industry is committed to making for the benefit of all Australians.??

It gave me deep satisfaction that all the folks I met on this trip have the same intent and share a moral obligation to provide pension members/participants a better and more dignified retirement.??As we all have similar passions, my ask of professionals in Australia, the UK and the USA, is to better collaborate across borders, share learnings, and continue to improve our systems for the betterment of the public we serve.