Adopting an Australian-style approach to pension regulation in the UK could boost a typical retirement pot of £100,000 by £12,000, according to the think tank Policy Exchange.

It stated that, using the Australian pension regulation model as an example, regulators being spurred to focus on outcomes had the potential to boost returns, particularly for those coming up to retirement who "suffer the most" under the current UK approach.

Policy Exchange's report outlined recommendations on what could be learned from Australia’s superannuation model and how the regulation of the UK pensions market might be improved.

Following the Chancellor’s recent announcement that the new Labour government would actively look at pension market reform, the paper argued that the UK regulatory framework for pensions was designed for an era of defined benefit (DB) schemes with broadly fixed outcomes.

It noted that the existing regulatory approaches had prioritised concepts such as safety and value for money (VFM) that were crucial for legacy DB schemes, arguing that the same approach has given little emphasis on the outcomes that matter more for defined contribution (DC) members.

In the report, Policy Exchange said the framework was proving increasingly outdated as DC schemes have become the dominant pension-saving vehicle for the current generation.

The report acknowledged that well-intentioned concepts such as VFM perhaps still made sense in 2012 when auto-enrolment (AE) was introduced, and pension costs were higher.

However, it suggested now that costs have been reduced successfully, the same concepts are allowing a system to develop where certain risk profiles, private market exposure, performance and contestability levels are too low.

It argued that while the King’s Speech contained certain recommendations to make some limited changes to the VFM framework, the current proposals do not go far enough to embrace a focus on outcomes.

Indeed, the report highlighted the benefits of adopting the Australian approach, stating that the regulations behind the superannuation system have a more proportionate approach to risk, better entrench competition, and deliver better overall outcomes for savers.

Policy Exchange estimated that the typical UK pension saver has missed out on gains of 0.7 per cent per year compared to the Australian pension saver.

It found that adopting an Australian-style approach to pension regulation could increase average retirement pots by £12,000.

The report highlighted that the pre-retirement cohort, which currently suffers the most under the existing system, would be the biggest beneficiaries of the proposed changes.

To address these challenges, the recommendations included an increased focus on DC pension outcomes, introducing performance league tables to increase competition and performance transparency, reversing the regulatory push for pre-retirement de-risking strategies, and increasing pension contributions.

Policy Exchange said that the government should include an objective of seeking to promote the best retirement outcomes for regulatory bodies including The Pensions Regulator (TPR) and the Financial Conduct Authority, while existing objectives like VFM would be downgraded to a supplemental status.

It also called for a centralised portal for DC pension fund performance, maintained by TPR, to be introduced, suggesting the initial focus for this would be on DC master trusts but would have a future focus on extending this to the default options offered within large group personal pensions.

In addition to this, Policy Exchange said that the existing regulatory priorities had forced schemes to adopt defensive asset allocations for older savers known as ‘lifestyling’, leading to poor performance for many years.

The report argued that the ‘lifestyling’ approach had been enforced far more rigorously in the UK than in Australia, demonstrating that good regulations could be more flexible.

As an alternative to de-risking, it recommended considering ways to enhance innovation in the annuity market, for instance by changing rules, like Australia has done, to allow retirement products such as investment linked annuities to flourish.

Furthermore, the report made the case that higher contributions are needed to sustain retirement incomes.

To combat this, it recommended increasing the AE minimum contribution rates from 8 per cent to 10 per cent by raising contribution by 0.5 per cent per year for four years, with employer contributions contributing the extra.

It said that this higher contribution rate would better sustain living standards in retirement, closer to the Australian contribution rate of 12 per cent.

The report also said that it expects this will help break the inflationary wage spiral the UK has recently been fighting, without negatively impacting total employee compensation.

Commenting in the foreword, former pensions minister, Ros Altmann, said: “Growing Pension Capital, the latest in a series of influential Policy Exchange contributions to the debate on reforming the UK pensions sector, discusses some important lessons to be learned from international best practice.

“I have always sought to champion the interests of pensioners who have worked hard through their lives and deserve dignity and prosperity in retirement.

“In that cause, we should consider good ideas and policies, wherever they might come from. Australia offers several.”

Adding to this, the report’s co-author, Christopher Mahon, said: “We can all understand why the regulator has focused on costs and safety, but it is time to encourage regulators to look beyond these two parameters and focus on the end goal of delivering good retirement outcomes.

“This requires a different mindset incorporating many more elements - each focused around growing capital over the long term."

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