Why higher returns are important

(article by John Aldersley published in Sun Herald, 1996

One of the most important drivers of the sharemarket in recent years has been the demographic shifts occurring. The baby boomers are entering their most important period for saving.

Ask a centenarian what has been the greatest single change they have seen over their lifetime and they will usually talk about improving health or life expectancy. Rising life expectancy combined with declining fertility mean that the proportion of old people in the community is growing rapidly. In 1990 9% of the world's population or 500 million people were over 60 years old. By 2030 the number will treble to 1,400 million. In Australia, the percentage of over 60's will increase from 15% of the population to over 30%. The increase is solely attributable to the Baby Boomers, those Australians born after the Second World War between 1946-64.

An ageing population places strains on the economy. Health and government pension spending rise and the proportion of people of working age to support it falls. The World Bank estimates that the present value of benefits scheduled to be paid between now and 2150 exceeds the present value of expected contributions by three times the GDP for most OECD countries. The shortfall must be met somehow. Increasing taxes and superannuation contributions will play a part. Increasing the retirement age may be essential. Reducing the benefits payable may be essential. Future retirees in Australia who intend relying on the old age pension are in for a shock if they think it will support a similar lifestyle to that of their parents. More than ever before, adding value to your investments so that you are able to fund your own retirement is paramount.

Pensions have been on the scene for decades as part of government and employer super schemes. In the commercial market, pensions in Australia were not popular and until 1993 were generally provided by life offices in the form of a lifetime annuity. Two key negatives limited their popularity. Life offices backed their pensions with fixed interest securities, and generally adopted conservative earnings rates. Secondly, under the contract where the annuitant died after ten years the annuity died with the client. The lump sum was regarded by most retirees as the preferred option. The lump sum was regarded by many retirees as an excuse for a binge. Many retirees took the money, spent it all on overseas holidays and then fell back on the old age pension. This became known as the double-dip.

In December 1993 the Australian government announced new regulations to allow a form of pension which overcame the deficiencies inherent with a lifetime annuity. This has become known as the allocated pension. The allocated pension is an accumulated benefit, and rather than guaranteeing an income for life,  the pension last as long as the funds in the member's account hold out. The size of the pension is at the discretion of the member. To prevent a de facto lump sum withdrawal, maximum yearly pensions were set. To prevent pension payments being deferred indefinitely to accumulate assets in a tax free environment a minimum pension limit applies. Minimum and maximum pension amounts are determined mainly by reference to the recipient's life expectancy and the amount of the accumulated benefit.

Handing control of the amount of the pension to the member had never been tried in any other country.


"Averting the Old Age Crisis." World Bank Policy Research Report 1994.