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Nature and History of Superannuation in Australia

Write an essay on "Superannuation in Australia". You are required to describe, supported by identifiable events, the nature and history of superannuation funds in Australia, the size of the superannuation sector, the structure or types of funds which operate in Australia, discuss its importance, identify current and recent challenges, including the effects of the global financial crisis of 2007-09, and offer recommendations for imptrovement of the system.
 

Superannuation refers to contributions that are made into your super fund by an employer and, ideally, topped by your own money to save for your retirement. This is always a pension plan program that the company creates so that its employees can benefit from this. By, 1976, superannuation had started. It started under the industrial awards which were then negotiated by movements of some unions (Drew & Stanford 2003)

These funds can, however, be supplemented by voluntary contributions which may include diversion of employee wages and salaries in superannuation contributions.

In Australia, superannuation is an aspect is that almost every Australian citizen has to experience at some point. Australians consider this as a very important aspect that actually has a lot benefits to the citizens who have retired from their work or employment. In Australia, the official retirement savings framework was discarded and the strained Age Pension fund was introduced. This with time became one of the second-best systems in the world. The introduction of superannuation in Australia was always seen as a mystery and its actualization was considered impossible. It started from a simple platform in the early decades and progressed slowly to become topmost, best systems across the globe.

During this period, some public employees and white-collar businessmen were provided with retirement savings (pensions) as part of benefits they achieve from their employees. Australia’s success towards gearing superannuation idea is owed to this period since this was when the implementation of such policy begun. Australia endures negative impacts of long-term nature of superannuation to provide the best systems (Authority 2007). 

The systems of Australia experienced huge reformation over 1900-2000. During this period, the concept of Age Pension was introduced by the government. This concept was then adopted though it took some time to develop. It took almost a decade before the Australian authorities decided to pass the Aging pension law. It was from this point that the Age Pension fund began. At this time, the government provided some of the best policies regarding pensions to the citizens.  During this same period, the government decided to introduce the concept of income tax.  At this time however, the savings made by the pubic into their superannuation account were exempted from tax and only the contributions from the employer were deductible.

Superannuation in the Pre-1900s in Australia

Later in the years, the Australian government wanted to introduce two bills related to superannuation that is, National Insurance and National Health and Pensions Bills. Both these two bills failed due to World War II (Worthington 2008).

During this period between 1950 and 1985, the government made some reformation on the Aged Pension. However, the reforms never included the introduction of private or guaranteed superannuation. Studies by Australian Bureau Statistics (ABS) showed that 51.3% of the employees were super-covered by 1988.  This kept on increasing and by 1990, the coverage was stood at 64%.

The modern superannuation began in 1991 and was accompanied by the introduction of the Superannuation Guarantee (SG). This new act of superannuation was meant to be a compulsory system for all employees in Australia. This was to be paid for by employers; this came into effect after one year. According to the statistics from the taxation office, the introduction of the new act increased the coverage to 80%. This has been increasing with time with the coverage now standing at 91% and the SG rate rose from 3% to 9%.

In 2005, the government developed two other systems. The new systems gave the citizens the options of choosing an individual’s retirement fund and the ability to retirement transition. Retirement transition is where persons contribute larger portions of their salary or wages to a super and in turn replace their salary income with a drawdown from the pension scheme.

Australian superannuation system is considered as one of the best systems in the world, it is currently ranked as the second-best system. Australia has about 500 operational superannuation funds. With existing operational superannuation funds, approximately 362 are considered to have assets that are worth more than 50 million. The largest sectors in the Australian superannuation market are the Wholesale and Retail Master Trusts (Worthington 2005). 

The superannuation system in Australia has the following basic structures;

  1. Investments Structure

Superannuation funds have a tendency to invest in wide varieties of assets within a given time period under the risks or returns associated.

  1. Trustee Structure

Considering their operations, superannuation funds operate as trusts with the trustees accountable for prudential fund operation. The trustees have the responsibility of formulating and implementing strategies that will be used for investment purposes.

There are a number of superannuation funds in Australia and they include;

  1. Industrial funds

These include all the funds operated by the employer’s associations and are entirely meant to benefit the members. The funds do not have any shareholders.

  1. Self-Managed Superannuation Funds (SMSFs)

Superannuation in the 1900s in Australia

These are also referred to as the Do-It0Yourself funds and are normally established by a small group of individuals. The groups are regulated by the Australian Taxation office. In this case, the trustees of the funds are usually the members themselves. Where the members involve a corporate trustee then the directors of the company will be considered as the members. These funds constitute the largest portion of all the Australian superannuation industry (Drew, 2003).

  1. Stand-alone funds

These are also referred to as the employer stand-alone funds as they are established by potential employers for their respective employees. And as such each employer defines his or her own structure that may not be used by another employer.

  1. Retail Master Funds

They are also called wrap platforms and are generally provided by financial institutions to the public. However, they are only provided to an individual and not a group.

  1. Wholesale Master Trusts

These are superannuation funds that are basically, run by various finance institutions to a given group of people or individuals.

  1. Public Employee Funds

These are usually provided by the government to its citizens. They are also referred to as the Public Sector Employee Fund (Langford, Faff, & Marisetty 2006).

  1. Small APRA Funds (SAFs)

These funds are usually established for a group of people who are less than five in number. It is mostly applicable to individuals who are in need of controlling their superannuation investments but are either unwilling or unable to meet SMSF Trusteeship requirements. The difference between SAFs and SMSFs is that for the case of SAFs, the trustee is an approved trustee. 

Individuals who make contributions to their superannuation accounts during their work life are entitled to a lot of benefits after retiring. Some of these benefits are discussed below;

  1. Retirement benefits

With the increased life expectancy in Australia, approximated to be 85 years, the retirement period can last a long time. And since an individual’s income reduces after retiring, it is important that one should consider saving enough funds for the retirement period (Cummings 2015). Thus, contributions made by an individual to a super account will enable one to acquire the funds required during his retirement period reducing dependency on the government or other people.

  1. Supplements the Age Pension

With the Age Pension scheme in place, Australian citizens are entitled to receive some amount from the government. However, the amount so received by an individual after retiring may not be enough cater for his or her lifestyle. This is especially true where one intends to engage in a lot of leisure activities after retiring such as going for vacations or enrolling into new classes. Hence, if one has some contributions into his or her super account, they will be able to add on the few Age Pension amount received and as such one will have fewer worries.

  1. It is an effective saving plan

Post-1950 Superannuation in Australia

Superannuation involves saving money to use during the retirement period and as such it is considered as a long-term investment. Because of its importance, the Australian government has provided a tax concession of 15% which is a lower rate compared to the average marginal rate of 45% that individuals are supposed to pay. In addition, the money deposited into a super account cannot be accessed until one reaches the retirement age, currently considered as 60 years. Therefore, individuals who start making contributions into the superannuation account immediately after entering the work life will have accumulated enough funds by the time they retire and thus will lead a comfortable independent life.

  1. Superannuation is a form of Insurance Cover

Individuals who have made contributions into a super account are allowed to use the funds to obtain an insurance cover. This is an effective form of financial security especially to the dependents of an individual in the case that he or she is disabled or dies. Some of the available insurance covers using the superannuation funds include life insurance, total/permanent disablement (TPD), and income protection (Svallfors & Taylor-Gooby 2007)

  1. Tax incentives

The tax incentives on superannuation are normally in terms of tax concessions. The tax concession offered by the government is aimed at encouraging individuals to make contributions into their super accounts so as to benefit after retirement. In general, the marginal rate on the superannuation funds is at a maximum of 15% which is a lower rate compared to the personal income rate.

From the benefits outlined above, it can be concluded that superannuation funds are an important aspect of life for every Australian individual and as such individuals should consider opening their super accounts as soon as they start the work life so that they can be able to accumulate enough funds to use during the retirement period.

Most of the challenges that face superannuation funds are basically due to the volatility in the share market. This has been the case since most (almost 60%) of the contributions made in the super account have been invested in the shares and as such individuals who make these contributions have all reasons to worry about their funds. The global financial crisis that occurred between 2007 and 2009 was a big blow to the superannuation industry. With most of the experts finding financial markets as the best way to finance a stable retirement, share volatility has made people think otherwise. The volatility of the share market has changed the whole idea of superannuation funds which were supposed to be added to the Age Pension funds. However, Instead of them being a top-up they are changing to be a trade-off. But with the government limiting the age pension due to global financial crisis, superannuation funds are now expected to be a key part of retirement financing. As a result, the global financial crisis has negatively affected the individual’s retirement life (Brown, Gallery & Gallery 2002).

Compulsory Modern Superannuation in Australia

During the 2007 global financial crisis (GFC), superannuation contributors were greatly affected and incurred a lot of losses. This is because the superannuation contributors were the biggest investors in capital raisings for different companies that succumbed to GFC. As a result, most of the superannuation contributors lost all their total contributions and holdings.

A recent challenge to the superannuation industry is to automate all the contribution-related transactions. The automation is meant to be implemented both in the superannuation industry and the self-managed funds. This is part of the government’s SuperStream initiative that is aimed at enhancing the processing of rollovers and contributions. The move is also aimed at reducing the number of lost accounts and unclaimed funds.

With a lot of challenges facing the superannuation system, there is a need to improve the existing superannuation system so that its benefits are realized. Some of these recommendations include;

  • Employers and other superannuation industry players should consider the automating their superannuation systems as required by the government so that efficiency is enhanced.
  • Also, the superannuation policies should not only focus on older people as in the current systems but also consider the younger individuals who have joined the work life.
  • The government needs to institute policies that will enhance accountability among the financial institutions involved with the superannuation funds.
  • To ensure sustainability of the system, the government should allow the superannuation to be flexible so that individuals can choose a system that will suit their work pattern.
  • There is the need to outline the objective of superannuation through a legislative means to avoid misinterpretations and enhance accountability. 

References

Authority, A.P.R., 2007. A recent history of superannuation in Australia. APRA Insight, 2, pp.3-10.

Bateman, H. and Mitchell, O.S., 2004. New evidence on pension plan design and administrative expenses: the Australian experience. Journal of Pension Economics and Finance, 3(01), pp.63-76.

Blundell-Wignall, A., Hu, Y.W. and Yermo, J., 2008. Sovereign wealth and pension fund issues.

Brown, K., Gallery, G. and Gallery, N., 2002. Informed superannuation choice: Constraints and policy resolutions. Economic Analysis and Policy, 32(1), pp.71-90.

Casson, P. and Russell, D., 2006. Universities Superannuation Scheme (Vol. 158, No. 171, pp. 158-171). Greenleaf Publishing in association with GSE Research.

Cummings, J.R., 2015. Effect of fund size on the performance of Australian superannuation funds. Accounting & Finance.

Drew, M., 2003. Superannuation funds: fees and performance. JASSA, (3), p.31.

Drew, M. and Stanford, J., 2003. Returns from investing in Australian equity superannuation funds, 1991–1999. The Service Industries Journal, 23(4), pp.12-24.

Drew, M.E., Stanford, J.D. and Veeraraghavan, M., 2002. Selecting Australian equity superannuation funds: A retail investor's perspective. Journal of Financial Services Marketing, 7(2), pp.115-128.

Horne, J., 2002. Taxation of superannuation in Australia: An assessment of reform proposals (No. 0212). Macquarie University, Department of Economics.

Jones, S., Van der Laan, S., Frost, G. and Loftus, J., 2008. The investment performance of socially responsible investment funds in Australia. Journal of Business Ethics, 80(2), pp.181-203.

Langford, B.R., Faff, R.W. and Marisetty, V.B., 2006. On the choice of superannuation funds in Australia. Journal of Financial Services Research, 29(3), pp.255-279.

Olsberg, D., 2004. Women and superannuation: still ms... ing out.[Paper in: Special Issue on Superannuation. Coates, Nick; Vidler, Sacha; and Stilwell, Frank (eds.).]. Journal of Australian Political Economy, The, (53), p.161.

Svallfors, S. and Taylor-Gooby, P., 2007. The end of the welfare state?: responses to state retrenchment (Vol. 3). Psychology Press.

Worthington, A.C., 2005. Coverage, knowledge and perceptions of superannuation in Australia.

Worthington, A.C., 2008. Knowledge and perceptions of superannuation in Australia. Journal of Consumer Policy, 31(3), pp.349-368.

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[Accessed 26 February 2024].

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