Analysis
By Steve Schifferes BBC News Online economics reporter

Australia is one of the few big countries that has gone down the route of compulsory private pensions - something that many critics of the UK's position think would be a good idea.

A system of compulsory pensions was first introduced as part of national wage bargaining in 1986

But Australia adopted the compulsory pension system for unique reasons - and the political difficulties now being experienced explain why many politicians in the UK would be reluctant to adopt such a system.

Australia's population was growing very fast in the 1950s and l960s, boosted by immigration as well as a natural increase.

But few people had private pensions, and there was a weak state pension system in place.

By the 1980s it became clear that the country was facing a massive problem - when the baby boomers and immigrants retired, the state would face an intolerable burden in paying for their retirement.

High tax threat

A system of compulsory pensions was first introduced as part of national wage bargaining in 1986 - employers agreed to contribute 3% to a superannuation fund, in return for reducing a 6% wage claim to 2%.

This doubled the number of workers covered by a pension scheme from 40% in 1987 to 80% by 1991.

The assets held in pension funds have increased from Aus$165bn in 1992 to Aus$532bn in 2002

In 1992, the Labour government decided that, in order to ease the burden on the state retirement system, compulsory pensions should be extended to all, not just those covered by wage bargaining agreements.

The Superannuation Guarantee made it compulsory for employers to contribute to a superannuation fund for each of the workers, at a rate set initially at 4% (or 3% for small employers) but rising to 9% over a 10 year period. That came into effect in July 2002.

Companies would face very high tax rates if they did not contribute to the pension schemes - which are generally industry-wide rather than based on individual firms.

The new Liberal Democrat/National Coalition government which took office in 1996 has supported the change, and 91% of Australian workers now have a pension fund.

Funds increase

By some measures, the creation of a funded occupational system from scratch in a decade has been a huge success.

The assets held in pension funds have increased from Aus$165bn (US $100bn, �60bn) in 1992 to Aus$532bn in 2002 with 237,000 different funds.

Since the big falls in the stock market this year, many people are finding that their pension pot, and potential retirement income, is a lot smaller

The industry funds are the fastest growing sector, with 7 million workers in 128 large superannuation funds, while 25% of workers are in individual company schemes.

People can also buy a personal pension directly from an insurance company, a bit like AVCs (Additional Voluntary Contributions) in the UK, and the federal and state governments also run their own schemes.

Most schemes, especially those in the private sector, are defined contribution schemes or money purchase schemes, which use the money accumulated to purchase an annuity on retirement, based on current market conditions.

And employees can also make top-up payments into their funds: around half of employees over 45 do so, ranging from one-third on low incomes to 75% on high incomes, contributing, on average, an extra 4% of their salary.

Problems remain

However, the Australian system is still facing a number of serious problems.

Since the big falls in the stock market this year, many people are finding that their pension pot, and potential retirement income, is a lot smaller than it once was - and many blame the government.

Australia is one of the few countries that has successfully made the transition from a state pension system to a funded private pension scheme

Those falls have also discouraged people from making further pension contributions, at a time when many experts are warning that even the 9% rate of employer contributions is not enough to ensure an adequate income on retirement.

Some believe that the government must ultimately insist on additional compulsory contributions from employees and employers alike - which employers fear could make their labour costs uncompetitive.

Indeed, when the former prime minister, Paul Keating, proposed raising contributions to 15%, it contributed to his 1996 electoral defeat.

And in the transition to a funded pension scheme, the generation in the middle is likely to lose out.

While young people may eventually accumulate a big enough fund to ensure a secure retirement, those now coming up to retirement - who began saving only in their 40s and 50s when compulsion was introduced - will still be dependent on the state pension.

Consensus needed

Australia is one of the few countries that has successfully made the transition from a state pension system to a funded private pension scheme.

But it took a real, looming crisis, and an unprecedented degree of political consensus to introduce such a change.

The difficulties in gaining support for increases in contribution rates to meet future needs show that even a compulsory system is not immune from the problems facing the UK pensions system.