Superannuation in Australia
Superannuation in Australia, or "super", is a savings system for workplace pensions in retirement. It involves money earned by an employee being placed into an investment fund to be made legally available to members upon retirement. Employers make compulsory payments to these funds at a proportion of their employee's wages. From July 2023, the mandatory minimum "guarantee" contribution is 11%, rising to 12% from 2025.[1] The superannuation guarantee was introduced by the Hawke government to promote self-funded retirement savings, reducing reliance on a publicly funded pension system.[2] Legislation to support the introduction of the superannuation guarantee was passed by the Keating Government in 1992.[2]
Contributions to superannuation accounts are subject to a concessional income tax rate of 15%. This means that for most Australians, the tax on their money sent to a superannuation account is less than the tax on money sent to their bank account. Australians can contribute additional superannuation beyond the 11% minimum, subject to limits. The maximum amount that may be contributed per year is $27,500.[3] Contributions higher than this are taxed at the person's ordinary marginal tax rate, meaning there is no tax benefit for contributing beyond that amount.[4] Ultimately, superannuation is a system of mandatory saving coupled with tax concessions.
As of 30 March 2022, Australians have AU$3.5 trillion invested as superannuation assets, making Australia as a nation the 4th largest holder of pension fund assets in the world.[5] The vast majority of this money is in defined contribution funds.
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For many years until 1976, what superannuation arrangements were in place were set up under industrial awards negotiated by the union movement or individual unions.
A change to superannuation arrangements came about in 1983 through an agreement between the government and the trade unions. In the Prices and Incomes Accord, the trade unions agreed to forgo a national 3% pay increase which would be put into the new superannuation system for all employees in Australia. This was matched by employers' contributions. Employers' and employees' contributions were originally set at 3% of the employees' income, and has been gradually increased.[6] Though there is general widespread support for compulsory superannuation today, at the time of its introduction it was met with strong resistance by small business groups who were fearful of the burden associated with its implementation and its ongoing costs.[7]
In 1992, under the Keating Labor government, the compulsory employer contribution scheme became a part of a wider reform package addressing Australia's retirement income dilemma. It had been demonstrated that Australia, along with many other Western nations, would experience a major demographic shift in the coming decades, of the ageing of population, and it was claimed that this would result in increased age pension payments that would place an unaffordable strain on the Australian economy. The proposed solution was a "three pillars" approach to retirement income:[8]
The compulsory employer contributions were branded "Superannuation Guarantee" (SG) contributions.[9][10]
The Keating Labor government had also intended for a compulsory employee contribution beginning in 1997-98, with employee contributions beginning at 1%, then rising to 2% in 1998-99 and reaching 3% in 1999-2000.[11] However this planned compulsory 3% employee contribution was cancelled by the Howard Liberal government when it took office in 1996.[12] The employer SG contribution was allowed to continue to rise to 9%, which it did in 2002-03. The Howard government also limited employer SG contributions from 1 July 2002 to an employee's ordinary time earnings (OTE), which includes wages and salaries, as well as bonuses, commissions, shift loading and casual loadings, but does not include overtime paid.
The SG rate was 9% from 2002-03 to 2013-14 when the Rudd-Gillard Labor government passed legislation to increase SG contributions slowly to 12% starting on 1 July 2015 and ending on 1 July 2019. However, the succeeding Abbott Liberal government deferred starting this planned increase by six years, to 1 July 2021.[12] The SG rate has been 9.5% of employee earnings since 1 July 2014, and after 30 June 2021 the rate is planned to increase by 0.5% each year until it reaches 12% in 2025.[13][14]
Initially, superannuation accounts were considered an employer matter but over time have evolved considerably. Superannaution is portable mainly through a system of preservation until a condition of release occurs (typically retirement) but a superannuation account maintains benefits while retired such as concessional tax on earnings. A member may move from fund to fund and can consolidate accounts. The October 2020 budget included a proposal (to become law) to mandate portability to encourage and support each Australian holding one account, which would remain portable. Further proposals are to mandate underperforming funds to be barred from accepting new members. The intention is to encourage performance to benchmarks for returns and fees.
Operation[edit]
Accumulation phase[edit]
Superannuation is compulsory for all employed people working and residing in Australia. Federal law dictates minimum amounts that employers must contribute to the superannuation accounts of their employees, on top of standard wages or salaries.
Most employees have their superannuation contributed to large funds - either industry funds (not-for-profit mutual funds, managed by boards composed of industry stakeholders), or retail funds (for-profit commercial funds, principally managed by financial institutions). However, some Australians can have their superannuation deposited into self-managed superannuation funds.[15]
The Australian Government outlines a set percentage of employee income that should be paid into a superannuation account. Since July 2002, this rate has increased from 9% to 10% in July 2021, and will stop increasing at 12% in July 2025. Employees are also encouraged to supplement compulsory superannuation contributions with voluntary contributions, including diverting their wages or salary income into superannuation contributions under so-called salary sacrifice arrangements.
Retirement phase[edit]
There is no standard retirement age in Australia. As of July 2023, members can start to draw some money from their superannuation once they reach age 60 (people born before 1 July 1964 will have already reached their required age under older rules[16]). On reaching age 65, or on ceasing employment after age 60 members have total access to their superannuation balance. In most cases this can be taken as a tax-free lump sum or a tax-free income stream.
Decisions on when to retire are likely to be influenced by the government Age Pension which, as of July 2023, commences at age 67.
At retirement, each member has a lump sum balance. Most superannuation funds offer an account-based (drawdown) product for drawing retirement income. Some funds provide access to lifetime annuities purchased using the member's balance.
An individual can withdraw funds out of a superannuation fund when the person meets one of the conditions of release, such as retirement, terminal medical condition, or permanent incapacity, contained in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994.[17] As of 1 July 2018, members have also been able to withdraw voluntary contributions made as part of the First Home Super Saver Scheme (FHSS).[18]
Superannuation funds[edit]
Trustee structure[edit]
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[edit]
Other than a few very specific provisions in the Superannuation Industry (Supervision) Act 1993 (largely related to investments in assets related to the employer or impacting a self-managed superannuation fund) funds are not subject to specific asset requirements or investment rules. A fund must maintain an investment strategy and comply with specific covenants contained in law at all times.[53] A fund must not lend to a related party and must not acquire investments from a related party unless permitted. There are no minimum rate of return requirements, nor a government guarantee of benefits. There are some 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.[54]
Criticism and issues[edit]
The interaction between superannuation, tax and pension eligibility is complex, meaning that many Australians struggle to engage with their superannuation accounts and utilise them effectively.[71]
The Australian superannuation industry has been criticised for pursuing self-interested re-investment strategies, and some funds have been accused of choosing investments that benefit related parties ahead of the investor.[72]
Some superannuation providers provide minimal information to account holders about how their money has been invested. Usually, only vague categories are provided, such as "Australian Shares", with no indication of which shares were purchased.
Losses to the superannuation funds from the 2007–2008 financial crisis have also been a cause for concern, said to be around $75 billion.[73]
An avoidable issue with Australia's superannuation system is employees failing to consolidate multiple accounts, thus being charged multiple account fees. In 2018, of Australia's 15 million superannuation fund members, 40% had multiple accounts, which collectively cost them $2.6 billion in additional fees per year.[74] Government initiatives to make consolidating accounts easier have reduced the percentage to 24% in 2022.[75]
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