Questions are being asked about whether privatising pensions failed pre-retirees.

More than one in four over-65s in Australia live in poverty by international measures and the privatisation of pensions has increased those risks for people close to retirement.

The surprising results are contained in Pensions at a Glance 2009: Retirement Income Systems in OECD Countries, released in June.

It shows that more seniors live below the poverty threshold in Australia (defined as half the median household income) than in all other OECD nations except for Korea, Mexico and Ireland.

The high risk of old-age poverty in Australia is mainly due to the relatively low level of the age pension: equivalent schemes in other OECD countries are worth 25 per cent more (compared with national average earnings) than the age pension in Australia.

New Zealand's basic pension, for example, is worth 80 per cent more relative to average earnings than the Australian age pension.

The OECD says the planned rise in the Australian age-pension rate to take effect from September will help to lift more older Australians out of poverty.

One of the likely reasons for the poor result is that the Australian super system is still maturing, with compulsory super introduced in 1992 at 3 per cent of salary. It has been at 9 per cent of salary only since 2002. Those retiring after a working life on 9 per cent super contributions will be much better off than many of today's retirees.

The report also highlights how the privatisation of pensions in Australia has increased the risk for those near or in retirement. Last year, the typical Australian super fund lost almost 28 per cent, the second-worst result behind Ireland, which lost more than 37 per cent. The average loss for the 30 OECD countries was 17 per cent. The OECD says the reason for the large losses is that the share of equities in Australian super fund portfolios was about 57 per cent before the global financial crisis hit, compared with an average of 36 per cent in the 20 OECD countries where the data was available.

The Australian financial services industry will argue that a year or two of negative returns are not what people should be focusing on because people save for their retirement over a working life. But the average annual 10-year return to June 30 this year for the average default fund was 5.4 per cent, according to SuperRatings.

Those who have been hurt most by the poor performance are those who have limited, or no, opportunities to make good their positions ??? those in, or close to, retirement.

The OECD recommends a "lifecycle" investment strategy for private pensions, which account for about 45 per cent of retirement income in Australia. The remainder comes from the age pension and defined-benefits pensions. The OECD says the lifecycle investment strategy would ensure that investments are automatically switched to less risky assets as people near retirement, protecting older workers' retirement savings from volatile sharemarkets.

"Most people don't want to make active investment decisions about their retirement savings," the lead author of the OECD report, Edward Whitehouse, says. "Governments should encourage lifecycle investing because it puts people's savings on auto-pilot and will protect old-age incomes from future crises," he says. The OECD recommends lifestyle funds should be the default investment option, which is where an employee's 9 per cent goes if they do not make a choice.

The OECD also argues that governments should also encourage retirees to take out annuities, which offer a certain, fixed, retirement benefit. Most take their super savings as an income stream invested in markets through an allocated pension. But that leaves them exposed to financial-market turmoil.

However, in the US, where lifestyle funds have been available for about four years, questions are being asked by US regulators whether these target-date funds, as they are known have let their investors down.

The funds were supposed to change the asset allocation as investors grew older to safer investments but some funds became riskier.

Target-date funds in the US are supposed to match the desired retirement date of the investor.

The funds became big business in the US after Congress enabled companies to make them the automatic choice for employees who do not nominate where they wanted to invest their super. The New York Times reported that funds marketed to people hoping to retire in 2010, for instance, have anywhere from 21 per cent to 79 per cent of their holdings in shares. It means that those investors hoping to retire next year, whose target-date funds where substantially invested in shares, fell in value in line with the sharemarket.

There are no rules about how to balance a portfolio as retirement approaches. Most default funds have an asset allocation of about 70 per cent to growth assets, such as shares and property and 30 per cent to defensive assets. Some experts say that for those aged between 55 and 65, a 50-50 split between growth and defensive assets may be appropriate.

A principal and consulting actuary with Watson Wyatt, Nick Callil says there is an argument for having the risks reduced for those older members who are not engaged with their super.

He says, though, determining the asset allocation that a member should have, based on age or a target date for retirement, is too simplistic. Other factors, such as the member's tolerance for risk, other assets they own and whether or not they are receiving the age pension, should be considered. Watson Wyatt is consulting with super fund trustees about whether some sort of target-date or lifecycle-like design would be better for the members of some funds than the usual approach of a single default option that covers all members.

Need to know

* One in four older Australians live in poverty.

* Australian super funds are the second-worst in OECD.

* OECD recommends target-date funds and annuities to reduce risk.

* But target-date funds in the US are under the regulatory spotlight after failing investors.

* Some Australian super funds are considering a new approach.

OLD-AGE INCOME POVERTY RATES
Ireland         30.6
Australia               26.9
United States   23.6
Japan           22
OECD            13.3
United Kingdom  10.3
Germany         9.9
France          8.8
Canada          4.4
New Zealand     1.5
Portion of over 65s with incomes below the OECD poverty threshold
SOURCE: OECD