Superannuation in Australia

Superannuation is a pension scheme in Australia. It has a compulsory element whereby employers are required by law to pay a proportion of employee's salaries and wages (currently nine percent) into a superannuation fund, which can be accessed when the employee retires.

Total superannuation industry assets at the beginning of the financial year 1996-2005

Annual total superannuation industry asset growth 1996-2005

Introduction

While superannuation arrangements had been in place for many years, the current compulsory system was introduced in 1992 by the Keating Labor government as part of a major reform package addressing Australia's retirement income policies.

The "Superannuation Guarantee" system was introduced to further build upon a system of reasonably widespread "industrial award" contributions negotiated by the union movement with support from the federal government between 1986 and 1988 as part of a "wage-tax trade off", allowing a non-inflationary means of wage increases.

It was anticipated that Australia, along with many other Western nations would experience a major demographic shift in the coming decades. Hence the foreseeable increase in age pension payments would have placed an unaffordable strain on the Australian economy. The proposed solution was a "three pillars" approach to retirement income:

• A safety net consisting of a means-tested Government age pension system
• Private savings generated through compulsory contributions to superannuation
• Voluntary savings through superannuation and other investments

Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees' income, and has been incrementally increased by the Australian government. Since 1 July 2002, the minimum contribution has been set at 9% of an employee's ordinary time earnings. The 9% is thus not payable on overtime rates but is payable on remuneration items such as bonuses, commissions, shift loading and casual loadings.

Though there is general widespread support for compulsory superannuation today, it was met with strong resistance by small business groups at the time of its introduction who were fearful of the burden associated with its implementation and its ongoing costs.

The Howard government has been criticised for its reluctance to increase the compulsory rate of superannuation. Had the compulsory rate been 15% since 1996, rather than the current 9%, total superannuation assets in Australia would be approaching $2 trillion - almost double the current level.

After over a decade of compulsory contributions, Australian workers have over $945 billion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy.

Compulsory superannuation in combination with buoyant economic growth has turned Australia into a 'shareholder society', where most workers are now indirect investors in the stock market. Consequently, a lively personal investment marketplace has developed, and many Australians take an interest in investment topics.

How it works

Employer contributions

Employers must make superannuation contributions to the employees' designated superannuation fund at least every three months. The superannuation contributions are invested over the period of the employees' working life and the sum of compulsory and voluntary contributions, plus earnings, less taxes and fees is paid to the person when they choose to retire. The sum most people receive is predominantly made up of compulsory employer contributions.

Special rules apply in relation to employers providing defined benefit arrangements. There are less common traditional employer funds where benefits are determined by a formula usually based on final average salary and length of service. Essentially, instead of minimum contributions, employers need to provide a minimum level of benefit.

Superannuation Guarantee law applies to all working Australians, except those earning less than $450 per month, or aged under 18 or over 70. Individuals can choose to make extra voluntary contributions to their superannuation and receive tax benefits for doing so.

Access to superannuation

As superannuation is money invested for one's retirement, strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment not available through Medicare.

Generally, superannuation benefits fall into three categories:

• preserved benefits;
• restricted non-preserved benefits; and
• unrestricted non-preserved benefits.

Preserved benefits are benefits which must be retained in a superannuation fund until the employee's 'preservation age'. Currently, all workers must wait until they are 55 before they are able to access these funds. All contributions made after July 1, 1999 fall into this category.

Restricted non-preserved benefits are benefits which, although not preserved, cannot be accessed until an employee meets a condition of release, such as terminating their employment in an employer superannuation scheme.

Unrestricted non-preserved benefits are those which do not require the fulfilment of a condition of release, and may be accessed upon the request of the worker. For example, where a worker has previously satisfied a condition of release and decided not to access the money in their superannuation fund.

Preservation age

Date of birth	Preservation age
Before 1 July 1960	55
1 July 1960 - 30 June 1961	56
1 July 1961 - 30 June 1962	57
1 July 1962 - 30 June 1963	58
1 July 1963 - 30 June 1964	59
After 30 June 1964	60

Eligibility for access to preserved benefits depends on a worker's preservation age. The Howard government announced changes in 1997 to the superannuation system designed to induce Australians to stay in the workforce for a longer period of time, delaying the effect of population ageing. Previously, any Australian could access their preserved benefits once they reached 55 years of age. However, after legislation was passed in 1999, an employee's preservation age depends on their date of birth.

Hence, by 2025, all Australian workers wishing to access their superannuation would be at least 60 years old.

Reasonable benefit limits

Reasonable benefit limits (RBL) are the maximum amount of retirement and termination of employment benefits that a person can receive over their lifetime at concessional tax rates. When a person receives a benefit the payer must report the contribution to the Australian Taxation Office (ATO). The ATO then determines whether the person has exceeded their RBL and notifies them if they have. There are a multitude of factors that can affect a person's RBL, complicating the calculation involved. [1]

In the 2006 budget the federal government announced that the RBL would be scrapped, along with a number of other simplifying changes to the legislation.

Superannuation taxes

Main article: Taxation of Superannuation in Australia

Most superannuation is concessionally taxed at a flat rate of 15% at three points: on contributions, on earnings and another on the final payout. These taxes contribute over $6 billion in annual government revenue. Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income. The Federal government announced in its 2006/07 budget that from 1 July 2007, Australians over the age of 60 will face no taxes on a lump-sum payout of their superannuation fund.

In 1996, the federal government imposed an extra 'superannuation surcharge' on higher income earners as a temporary levy to raise revenue. As part of the 2001 election campaign, the government promised to reduce the surcharge from 15% to 10.5% over three years. The superannuation surcharge was eventually scrapped in the 2005/06 budget, and has been abolished since 1 July 2005.

From January 1 2006, the government has allowed the splitting of contributions with a spouse. This allows a couple, who are members of superannuation funds, to split their contributions — personal and employer — evenly. They can thus reduce the risk of exceeding their reasonable benefit limits and therefore reduce their chances of paying a higher rate of tax on their retirement savings.

Superannuation co-contribution scheme

Since 1 July 2003, the Government has made available incentives of a Government co-contribuition of up to $1,500 for lower income employees who make personal contributions to their own superannuation fund. Depending on individual income thresholds, the Government pays up to $1.50 for every $1 contributed.

Superannuation Funds

Trustee structure

Superannuation funds operate as trusts with trustees being responsible for the prudential operation of their funds and in formulating and implementing an investment strategy. Some specific duties and obligations are codified in the Superannuation Industry (Supervision) Act 1993 - other obligations are the subject of general trust law. Trustees are liable under law for breaches of obligations. Superannuation trustees have, inter alia, an obligation to ensure that superannuation monies are invested prudently with consideration given to diversification and liquidity.

Investments

Other than a few very specific provisions in the Superannation Industry (Supervision) Act 1993 (largely related to investments in assets related to the employer) funds are not subject to any asset requirements or investment exposure floors. There are no minimum rate of return requirements, nor a government guarantee of benefits. There are some minor restrictions on borrowing and the use of derivatives and investments in the shares and property of employer sponsors of funds.

As a result, superannuation funds tend to invest in a wide variety of assets with a mix of duration and risk/return characteristics. The recent investment performance of superannuation funds compares favourably with alternative assets such as ten year bonds.

Types of superannuation funds

Share of superannuation industry fund assets

There are about 300,000 superannuation funds in operation in Australia. Of those, 362 have assets totalling greater than $50 million.

There are six main types of superannuation funds:

• Industry Funds are multiemployer funds run by employer associations and unions such as Cbus.
• Wholesale Master Trusts are multiemployer funds run by financial institutions for groups of employees. These are also classified as Retail funds by APRA.
• Retail Master Trusts/Wrap platforms are funds run by financial institutions for individuals.
• Employer Stand-alone Funds are funds established by employers for their employees. Each fund has its own trust structure that is not necessarily not shared by other employers.
• Do-It-Yourself Funds (or Self Managed Superannuation Funds) are funds established for a small number of individuals (usually fewer than 5).
• Public Sector Employees Funds are funds established by governments for their employees.

The vast majority of the funds are self-managed funds. Retail and Wholesale Master Trusts are the largest sector of the Australian Superannuation Market

Choice of superannuation funds

From 1 July 2005, changes to the law mean that many Australian employees will be able to choose which fund their employer's future superannuation guarantee contributions are paid into. Choice of superannuation funds allows workers to:

• change funds when their current fund is not available with a new employer;
• consolidate superannuation accounts to cut costs and paperwork;
• change to a lower-fee and/or better service superannuation fund;
• change to a better performing superannuation fund.

Regulation

Legislation

Superannuation funds are principally regulated under the Superannuation Industry (Supervision) Act 1993 and the Financial Services Reform Act 2002. Compulsory employer contributions are regulated via the Superannuation Guarantee (Administration) Act 1992

Superannuation Industry (Supervision) Act 1993 (SIS)

The Superannuation Industry (Supervision) Act sets all the rules that a complying superannuation fund must obey (adherence to these rules is called compliance). The rules cover general areas relating to the trustee, investments, management, fund accounts and administration, enquiries and complaints.

SIS also:

• regulates the operation of superannuation funds; and
• sets penalties for trustees when the rules of operation are not met.

In June 2004 the SIS Act and Regulations were amended to require all superannuation trustees to apply to become a Registrable Supernnuation Entity Licensee (RSE Licensee) in addition each of the superannuation funds the trustee operates is also required to be registered. The transition period is intended to end 30 June 2006. The new licensing regime requires trustees of superannuation funds to demonstrate to APRA that they have adequate resources (human, technology and financial), risk management systems and appropriate skills and expertise to manage the superannuation fund. The licensing regime has lifted the bar for superannuation trustees with a significant number of small to medium size superannuation funds exiting the industry due to the increasing risk and compliance demands.

The Financial Services Reform Act 2002 (FSR)

The Financial Services Reform Act covers a very broad area of finance and is designed to provide standardisation within the financial services industry. Under the FSR, in order to operate a superannuation fund, the trustee must have a licence to run a fund and the individuals within the funds require a licence to perform their job.

With regard to superannuation, FSR:

• provides licensing of 'dealers' (providers of financial products and services);
• oversees the training of agents representing dealers;
• sets out the requirements regarding what information must be provided on any financial product to members and prospective members; and
• sets out the requirements that determine good-conduct and misconduct rules for superannuation funds.

Regulatory bodies

Four main regulatory bodies keep watch over superannuation funds to ensure they comply with the legislation:

• The Australian Prudential Regulation Authority (APRA) is responsible for ensuring that superannuation funds behave in a prudent manner. APRA also reviews a fund's annual accounts to assess their compliance with the SIS.

• The Australian Securities and Investments Commission (ASIC) ensures that trustees of superannuation funds comply with their obligations regarding the provision of information to fund members during their membership. ASIC is also responsible for consumer protection in the financial services area (including superannuation). It also monitors funds' compliance with the FSR.

• The Australian Taxation Office (ATO) ensures that self-managed superannuation funds adhere to the rules and regulations. It also makes sure that the right amount of tax is taken from the superannuation savings of all Australians.

• The Superannuation Complaints Tribunal (SCT) administers the Superannuation (Resolution of Complaints) Act. This Act provides the formal process for the resolution of complaints. The SCT will try to resolve any complaints between a member and the superannuation fund by negotiation or conciliation. The SCT only deals with complaints when no satisfactory resolution has been reached.

See also

• Taxation of Superannuation in Australia
• Australian Government Future Fund
• 401(k) - United States
• Registered Retirement Savings Plan - Canada
• Industry Superannuation

External links

• Australian Taxation Office - Superannuation
• Super Choice