As the superannuation industry awaits next month's release of the Stronger Super Peak Consultative Group's report, which will reveal the course of implementation of one of the most sweeping reform packages the sector has experienced in its 20-year existence, some critics are saying the measures will amount to a missed opportunity.

This is not because the proposals are wrong, but because they don't go far enough. The criticism is directed at the heart of the Australian system, the defined contribution (DC) model.

Leaning on the research of University of Toronto Rotman International Centre for Pension Management director Keith Ambachtsheer, the critics point to a number of weaknesses in the DC model.

Most people are hesitant, inconsistent and sometimes even irrational planners of their own financial future, Ambachtsheer has argued, while the situation is not helped by the average super member not having access to the same level of information as financial services professionals.

And although Australia still has the age pension, the DC system exposes members to longevity risk.

"Personally, I believe compulsory superannuation is great and the 9 per cent going to 12 per cent is great, but we've made an enormous blunder by going to defined contribution, choice and accumulation, and moving away from defined benefit (DB) funds," University of Technology adjunct professor at the Centre for Capital Market Dysfunctionality Jack Gray said last week.

Gray, usually the most vocal but by no means the only critic to advocate a return to a DB-style system, argued that when comparing like for like, studies showed DB funds did better in the long term than DC funds.

"When you talk to people in the industry sotto voce, quietly in the corner, they all admit defined benefit is so much better. Almost anyone admits it, of course it is better, but we gave up on it too quickly," he said.

But Ambachtsheer pointed out in his book, Pension Revolution: A Solution to the Pension Crisis, that DB fund were not the Holy Grail. "DB plans suffer from a fatal flaw. By socialising risk bearing without clarity about how, and by whom the very material risks embedded in DB arrangements are borne," he said.

"We should not be surprised that when financial surpluses appear on DB plan balance sheets, there are fights about who 'owns' them."

He also argued there was a danger in relying on collective risk-bearing arrangements, because the model leaves the possibility to shift risk from strong to weaker participants in the system.

But there are more practical problems with the DB system. The Netherlands has had a DB system for many years, but like many countries that implemented the system it set strict requirements around meeting pension funds' liabilities.
 
Dutch pension funds were required to hold assets with a market value of 105 per cent of their liabilities to members. The idea behind this requirement was that pension funds would always be able to meet the financial obligations to all their members.

But the problem with this legislation was that the coverage ratio was calculated on an annual basis. This meant the only time funds would not be able to match their liabilities was in market downturns, forcing funds to sell off investments at the bottom of the cycle.

This problem became most painfully apparent during the recent global financial crisis. Coverage ratios started to decline sharply in 2008 and in March 2009 the $300 billion Algemeen Burgelijk Pensioensfonds had a ratio of no more than 83 per cent.

It caused the Netherlands to revise the entire system, and proposals have been made to also move to a DC-style system.

Gray acknowledged these problems. "Part of the problem is bad investing and another part of the problem is to try to match liabilities, that is not easy to do," he said.

"It is not perfect, but all the studies from Keith Ambachtsheer show that if you compare like-for-like, risk-adjusted, cost-adjusted returns, defined benefit over long periods of time do better.

"Jeremy Cooper missed a chance; it should have been OurSuper, not MySuper."

Ambachtsheer, however, proposed a different option. He said the optimal system would include automated systems that dynamically adjusted individual contribution rates over time, and tied the optimal investment policy for each individual participant to their age with the goal of delivering a target pension within reasonable bounds.

This model deals with longevity risk by including the purchase of deferred life annuities over time as part of the automated investment policy design.

It sounds somewhat esoteric, but Ambachtsheer said the system had been tried and tested by the US$453 billion Teachers Insurance and Annuity Association-College Retirement Equities Fund, a retirement system for current and retired United States college education and research employees.

He said the fund had provided a comfortable old age for its members since it was established in 1918.

The publication of the consultative group report next month - expected to be on 15 August - will reveal much about what Australia's future super system will look like, but if history has taught us one thing, it is that the search for the optimal model is unlikely to be completed any time soon.