

It's estimated that by 2030 only three working Australians will pay income tax for every retired person on the Age Pension. About 20 years ago, that ratio was six to one. Photo: Nic Walker

When Christine Leaves quit full-time work in her late-50s, she spent most of her small retirement savings on a new car. Now 67, and relying on a government pension, she's back at work as a part-time publicist to make ends meet.

Leaves, who says she had to sell all her investments to afford to move to the quiet retirement village where she now lives on the outskirts of Sydney, is among hundreds of thousands of Australian retirees who outlive their superannuation - mandatory retirement funds - highlighting shortcomings in the world's fourth-biggest retirement savings industry.

To be sure, Australia's pioneering $1.7 trillion 'super industry' - bigger than the country's annual economic output - provides more than $72 billion a year in retirement funds, double the regular federal pension. And it's held up as a model for other developed countries.

But the industry is plagued by high fees and a narrow range of products for retirees to invest their savings in. Coupled with poor spending decisions by retirees - who often cash in their super and splash out on holidays and cars - it has meant more Australians are outliving their investments.

Faced with an ageing population, as the baby boom generation heads into retirement, the government acknowledges the system is inadequate, with federal pensions soaking up a bigger chunk of national revenue. The government plans to raise the retirement age for the standard pension to 70 by 2035.

The superannuation system, which has grown rapidly since its 1992 launch, is likely to be a focus of the Financial System Inquiry, a government-nominated panel that will make recommendations to reform the financial services sector over the next decade. The panel's first observation is due by the mid-year.

Not having enough money saved in their super accounts for retirement will make retirees more dependent on government pensions, and poses fiscal risks as most superannuation savings are currently channelled into the housing market, according to the Centre of Excellence in Population Ageing Research (CEPAR).

Leaves says her super didn't really help her plan her retirement. "The amount was really insignificant," she said, adding she could never afford to retire completely. "We didn't have any education (about super), employers never spoke about it, we were never encouraged (to save)."

Super sting

Funding for retirees is becoming harder.

It's estimated that by 2030 only three working Australians will pay income tax for every retired person on the Age Pension - which is worth around $33,000 a year for a couple. About 20 years ago, that ratio was six to one. About 80 per cent of retirees rely on the federal pension, government data shows.

The superannuation system is among the world's most expensive, according to an April report by Grattan Institute, with Australians paying $20 billion in fees and expenses on their balances, more than three times the median charged in other countries. "High fees would not be a concern if Australians were getting value for money. But high fee funds are damaging our retirement savings," it noted.

Returns from these funds have been dismal. In 2012, for example, Australia was one of only two countries to post a negative rate of return, according to OECD global pension statistics. Over the five years to 2012, Australian pension funds lost 2.6 per cent. In comparison, Denmark and the Netherlands returned 6.1 and 3.5 percent, respectively.

Those poor rates of return amid the global financial crisis have made many Australian retirees risk averse.

John and Beverly Marsden, close friends of Leaves, say they constantly worry about outliving their super, but have held on to their savings as they don't trust high-charging financial advisers who refuse to say how much they will return.

"People are largely on their own, facing a complex and far-reaching decision. It's not surprising that many take the least daunting option and take the cash," said Sacha Vidler, chief economist at Industry Super Australia.

The problem is often made worse by what retirees do when they take their super lump sum. At least half use the money to pay off mortgages, debts and on home renovations, but more than a fifth blow it on holidays and cars, according to an Australian Bureau of Statistics survey for the year to June 2013.

Out of teens

The super system is yet to mature, with only about half of Australia's current workforce having benefited so far.

Initially, employers contributed 3 percent of salary on behalf of their staff. As a result, average superannuation balances have been insufficient for a comfortable retirement, experts say. Employer contributions have since risen to 9.25 percent and are set to grow to 12 percent, rising by 50 basis points each year from 2018.

Even so, retirees - who can access their super funds tax-free between the ages of 55 and 65 - are hard pressed by a lack of choice for where to invest. The most popular investment tool - account-based pensions - offer phased withdrawals, but expose investors to market volatility and don't manage the risk of living longer either.

Deferred annuities, which only start paying after a certain period, and long-term care products that are widely available in the United States, Britain and Canada do not exist or operate with various barriers, making then uncompetitive.

"In many ways, the Age Pension is the perfect retirement product, it's just not big enough," said Richard Howes, CEO of Challenger Life, Australia's largest annuities provider. "Part of the reason why people's money is running out is because account-based pensions fail. So, it makes sense to have private pensions to bridge the gap."

The Association of Superannuation Funds of Australia (ASFA) reckons a couple would need a pension paying $57,817 a year to have a comfortable retirement.

New offerings?

The industry is slowly warming to the need to have a wider suite of retirement products. Challenger's Howes expects rising demand to spur more competition in the sale of annuities.

Challenger Life sold $270 million of lifetime annuities in the six months to December, more than it did in the whole year to June 2013, showing signs of growth in a struggling market.

Overall, annuities still have a much smaller market share. Only about $2.2 billion of annuities were sold last year, but industry experts see that topping $3 billion in 2014.

"We are seeing financial advisers getting a lot more interested in annuities," said Nicolette Rubinsztein, General Manager, Advocacy and Retirement, at fund manager Colonial First State. "That is one area which we would expect to see product development around. It's also very good value for money."

Industry groups recently recommended a slew of measures to the Financial Systems Inquiry - from making the system more transparent and lowering fees to allowing for new retirement products and raising the quality and integrity of financial advice.

But, until that happens most retirees will have to keep a close eye on the pennies. "I worry all the time about outliving my super," said 73-year-old John Marsden. "You just gotta live within your budget."