Super pension is final frontier

By Karina Barrymore    

Superannuation pensions are becoming the new `investment frontier’ as more Australians switch their super fund over to pension mode.

While all the focus during the past two decades has been on building up super balances and making contributions, attention is now turning to the performance of super pensions.

Often called account-based pensions or allocated pensions, these income-paying funds are what the whole retirement system is about. The investment choices and performance of pension funds have a big impact on retirement lifestyles.

However, there is a growing risk of people outliving their super and of people withdrawing all their money at retirement, leaving them without any ongoing income.

Jeremy Cooper’s recent super system review recommended the Federal Government put in place a compulsory pension fund to follow on from its low-cost MySuper fund, but this was not adopted.

“The average retirement balance is still low. It doesn’t make sense to force these funds to offer a post-retirement product right now,” Australian Institute of Superannuation Trustees chief executive Fiona Reynolds says, “but this will certainly change in years to come.

“Managing longevity risk (people’s retirement savings drying up before they die) will become a major issue as our population ages and our compulsory super system matures.

“Years ago the average person lived for less than a decade in retirement.

“But with the average retirement now stretching more than 20 years, there is a real risk people’s money will run out.

“Managing this longevity risk is the missing link in our retirement system.

“We need to start thinking harder and more creatively about how to ensure people’s super will last the distance.”

The average super balance at retirement is still about $75,000 for women and $150,000 for men, so many people will have super pensions paying less than $15,000 a year in retirement.

Independent research company SuperRatings managing director Jeff Bresnahan says pension fund returns during the past year performed almost on a par with their more higher profile super fund stablemates.

The median return from a balanced pension was 9.25 per cent in the past financial year, compared with 9.79 per cent for the average super fund.

PENSION FUND V SUPER FUND

Source: SuperRatings (Median returns to June 2010)