Superannuation and Investments

Steps Towards a Default Pension System

Garvin Tso presenting at the All Actuaries Summit 2025.

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I presented my paper Default Pension Mechanism at the Actuaries Summit 2025, which highlighted that more than 1 million Australians with over $400 billion in super could benefit by moving their money from the accumulation phase to the pension phase and going tax free.

My new projections now show that this will increase further to 2.8 million Australians with $1 trillion in super by the end of the decade.

Currently, the expected cost to these members by not moving to the pension phase is substantial:

  • $2 billion in additional investment earnings every year (and growing)
  • $2 billion in unclaimed retirement bonuses (and growing)
  • $20.7 billion in retirement income to improve their standard of living and stimulate the broader economy every year (and growing)

The intention of this article is to bring attention to the issue that:

  1. There is a clear need for a default move to the pension phase
  2. Account-based pension products are a suitable default

Having examined the data, these conclusions are clear and compelling. Nonetheless, I continue to observe concerns raised by some in the industry that default is not the right approach, or that there is no way to make default work for everyone.

There are further issues around policy design and administration, which I explore in my paper, but it is premature to progress to these more detailed discussions until we establish agreement on the two fundamental points above.

I hope to build consensus within the profession so that we can present a united front to drive change.

The need for a default move to the pension phase

My conservative estimates [1] for the number of Australians eligible for pension products but still in the accumulation phase were:


Number of members

FUM

Lost earnings

Retirement bonus

Retirement income

FY2024

1,064,000

$398 billion

$1.99 billion

$1.99 billion

$20.7 billion

FY2023

977,000

$343 billion

$1.72 billion

$1.72 billion

$17.8 billion

FY2022

844,000

$286 billion

$1.43 billion

$1.43 billion

$14.9 billion

FY2021

742,000

$256 billion

$1.28 billion

$1.28 billion

$13.3 billion

Total



$6.42 billion


$66.7 billion


Beyond the sheer scale of the issue at hand, the number of qualifying Australians has increased by 43% in just three years, resulting in a 55% increase in FUM.

These figures are expected to continue growing, with affected FUM projected to reach $1 trillion by the end of the decade. Addressing this issue should be a priority for the system.

Two factors are driving this trend:

1. The silver tsunami of baby boomers reaching retirement

We expect the number of Australians entering retirement in the coming years to continue to grow rapidly.

The latest ABS data shows that the number of Australians over 65 will increase from 4.7 million to 7 million over the next 15 years.

We are also seeing increasing levels of superannuation balances at the point of retirement, as each successive cohort retires with more super than the preceding cohort due to the higher levels of compulsory super throughout their working lives.

2. Persistent disengagement

More than 90% of members who appeared on our list in one year appeared again the following year. It could be argued that Australians are not taking action at least partly because they are unaware of what they are missing out on.

The average Australian's financial literacy is objectively poor, with 45% of Australian adults described as “financially illiterate” [2] . Compound this with the overwhelming complexities around retirement decision-making, it is often simply easier to do nothing. What we end up with is effectively the current default – members staying in accumulation phase.

While advice, education, and nudges can assist, experience shows that such campaigns rarely convert more than 10% of members. These tools are valuable, but insufficient on their own for a problem of this magnitude.

Hypothetically, if we could with the wave of a magic wand fix half of a $1 trillion problem, we are still left with a $500 billion problem.

This challenge is comparable to the issue of account balance erosion from insurance premiums prior to PYS and PMIF legislations. At that time, many young, disengaged members were better off without insurance, yet few acted. Legislative change to default them out of insurance has resulted in improved outcomes for the majority. There is a precedent here to show that a similar approach may be helpful in improving member outcomes and can work here.

Account-based pension products as a suitable default
No one is worse off – exceptions are rare.

A common counter-argument for default is that "making a wrong choice is worse than making no choice". This argument does not apply to account-based pension products, which are retirement income product that provides full flexibility.

The member can completely roll back to their original position if they so desire, while benefiting in the interim.

My paper explores numerous other scenarios and demonstrates that members will always be better off, with the exception of 0.1% of affected members – exclusively very high net-worth individuals.

The population-wide benefits outweigh the minor cost to the already most advantaged group within superannuation.

The account-based pension product can be treated as a stepping stone to other retirement income products.

As I have stated, the account-based pension product offers full flexibility. This means that members can use any portion of their account to purchase other retirement income products at any point in the future, should they find them more suitable for their personal circumstances.

The account-based pension product is the one product that all super funds currently have

All super funds already offer account-based pension products, making adoption feasible with fewer changes.

For many funds, this is the only retirement product they offer.

While there is merit in exploring alternatives with longevity protection, the lack of a clear consensus on such products suggests it would be pragmatic to begin with an account-based pension default. More complex options can be considered later.

Conclusion

The data makes a compelling case that a default pension system is needed and that account-based pension products are a workable foundation. While there are further design and implementation questions to address, we cannot move the conversation forward until we agree on these fundamentals.

I encourage the profession to work collaboratively towards a shared position so that we can drive meaningful change for the benefit of Australians and the broader economy.

References

[1] Includes members of APRA-regulated funds only. Conservative assumptions were selected every step of the way where a choice was available. More details can be found in my paper.

[2] Financial Literacy in Australia: Insights from HILDA data, Professor Alison Preston, March 2020

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About the authors
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Garvin Tso
Garvin is Head of Superannuation at the boutique consulting firm Laneway Analytics, where he expresses a contemporary take on the traditional commercial and technical skills obtained through his training as an actuary. Passionate about all things data and super, Garvin places Members' Outcome on the forefront of his calling.