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Landmark Australian report warns on pensions ‘bank accounts’

A wide-ranging inquiry into the Australian financial system has suggested savers could benefit from greater pooling of risk and warns pensioners with bank account-style pensions will suffer from reduced living standards.

The Murray Review, led by inquiry chairman David Murray, assessed the health of the Australian auto-enrolment pension system, known as MySuper.

It concludes: “Greater use of risk pooling could significantly increase retirement incomes generated from accumulated balances. This could allow individuals to allocate consumption throughout their lives better.”

It says 94 per cent of Australian pension assets are held in “account-based” pensions where pensioners can take ad-hoc payments.

In the UK there have been fears comparing pensions to bank accounts could encourage people to spend their savings too quickly.

The report says: “An individual with an account-based pension can reduce the risk of outliving their wealth by living more frugally in retirement and drawing down benefits at the minimum allowable rates.

“This is what the majority of retirees with account-based pensions do, which reduces their standard of living.”

It says if risk is pooled between members, incomes could be 15 to 30 per cent higher compared to the “current typical strategy of drawing the minimum amount from an account-based pension”.

Just Retirement director Steve Lowe says: “A key message from the Murray report is people are focusing more on taking care of their pot of money than they are on taking care of themselves.

“It recommends that when they retire they should be ‘nudged’ towards products that tip the balance back in favour of having more to spend during their own lifetimes.

“I think we have a lot to learn from the report in the UK because we are about to introduce a system which puts even more responsibility on individuals, not just allowing them to take money when they want it but to hoard it when they ought to be using it to enjoy their later lives.”

Speaking yesterday at the Committee for Economic Development of Australia, Murray said: “The retirement phase of Australia’s superannuation system is under-developed.

“Members need more efficient retirement products that better meet their needs and increase their capacity to manage longevity risk.

“We therefore recommend that all fund members should be offered what we have called a Comprehensive Income Product for Retirement when they switch from accumulation to retirement. This would combine an account based pension with a pooled longevity risk product.

“Retirees would benefit from these products because they would have higher incomes and would not be exposed to the risk of outliving their savings.”

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