Superannuation In Australia: Overview, History, And Importance

Australia’s Three-Pillar System

Question:

Describe about the “Superannuation in Australia”.
 

In Australia, superannuation refers to accumulated funds arrangement made by people in Australia to provide them retirement income. This is encouraged by the Australian government and supported with other tax benefits. Australia’s superannuation system is ranked with number three in the world lagging behind by Netherlands and Denmark only (Copy of home (2016)). There is a minimum standard set by the government for contributions as well as for superannuation fund management for employees. Contributions have to be made by the employer for employees a part from the salary and wages provided to the employees. 

Australian retirement 3 pillar system is (Australia’s three-pillar system 2016):

• This contribution was 9.5% since July 2014 but is proposed to increase up to 12% from 2019((APRA) 2014).
• Tax concessions are also focused to attract for voluntary concessions.
• Retirement age which is currently 65 years for males and 64 years for females is to be increased to the age of 67 years. But veterans would get benefit before five years from civilians. 

These elements are subject to change if:

• Employers are ready to pay a higher percentage than a government has decided.(large companies, a good employer)
• Employees are eager to pay pre-tax contributions from their wages and salary packages.
• After tax contribution is also a way to contribute, which is $1, 50,000 cap a year or $450,000 in a period of three years.
• Government contributing a higher of up to $1,000 a year for low income groups. 

Current superannuation scheme in Australia was launched in 1992 July according to which all employers have to contribute for retirement scheme of their employees. It was started with a percent of 3% of the wages of the employees, But currently it is 9% (APRA 2016). 

It was first came in existence in 19^th century in Australia. Superannuation was very common t use in 19^th century which directly refers to the retirement benefits or we can say pension schemes. In most countries it is refereed as private pension which is known as superannuation by Australians. It is not very clear why pension is termed as superannuation in Australia but is different from what is provided by the private parties and what is provided by government as age pension. It could be stated as what the retirees get after a longer period of working life an employee’s gets in lump sum. 

Firstly it was provided by bank of Australiasia in October 1842, which was available upto 1940s the benefit of superannuation was available only to males, public sector group employees of large companies.  Employer provided a small amount of benefit only and that was also not very compulsory. After 1974, 32.2% of salary and wage earners were considered for superannuation out of which 40.8% were male and only 16.5% were females. At that time superannuation was provided in the form of defined benefit funds.

In order to make superannuation a universal approach, ACTU came in form and attached with the government and it was announced to pay 3% of wages and salaries of employees as superannuation by the employer to his/her employees. It changes many of lives of employees in Australia but not of all. 

This submission was made by in accordance to some supporting arguments:

• First implication was that, the workforce and population is getting old.
• Positive effects of last retirement benefits.
• Wide disparity existing in the economy as most of the population was not covered under superannuation schemes only large income groups, and male populations are getting these benefits. It was proposed that females and low income groups are also entitled to get these benefits. 

Superannuation funds were $2,046 billion at the year ending 2015 in December quarter which was slightly high from the last one (Superannuation Statistics 2016). It was nearly $1 billion in March quarter of 2015 which was just increased by 6.1% at December end of the year (Works, S. (2016). Total assets were $449 billion in December 2015 which was 14.3% more from the last year. 

Feb 2016 

Overview

Type of fund	Total assets ($billion)	No. of funds	No. of accts (June 15)
Corporate	54	36	0.3 million
Industry	446	43	11.3 million
Public sector	354	38	3.5 million
Retail	541	148	13.8 million
Funds with less than 5 members	597	568,943	1.1 million
Balance of statutory  funds	56
Total	2,046	30.0 million

Manner of investment	$ billion
Directly invested	480
Placed with Investment Managers	677
Invested in Life Office Statutory Funds	195
Total assets	1,352

Dec quarter 2015	$ million
Employer DB contributions	3,539
SG contributions	13,858
Salary sacrifice	2,009
Member contributions	5,162
Net rollovers to SMSFs	1,740
Lump sum benefits	8,157
Pensions	7,544
Contributions taxes	2,469
Earnings tax	986
Operating expenses	1,609
Net earnings	36,255
Net growth	41,586

Asset class	Amount ($billion)	%
Cash	166	12
Australian fixed interest	183	14
International fixed interest	96	7
Australian listed shares	317	24
Listed property	45	3
Unlisted property	71	5
International shares	295	22
Infrastructure	61	5
Hedge funds	24	2
Unlisted equity	62	5
Other	31	2
Total	1,352	100

Characteristis	Amount($billion)	%
Cash	37	8
Australian fixed interest	51	11
International fixed interest	27	6
Australian listed shares	97	22
Listed property	9	2
Unlisted property	34	8
International shares	115	26
Infrastructure	32	7
Hedge funds	0	0
Unlisted equity	27	6
Other	15	3
449	100

In Australia there are around 500 types of superannuation funds currently operating. 362 out of 500 have total asset of greater than $50 million. Funds are totalled of $2.05 trillion in March 2015(Ato.gov.au. 2012)

Superannuation fund assets

History of Superannuation in Australia

This fund offers a new type of account. This will replace the default accounts will super funds accounts. It can be one chosen by the employee or the employer. It offers

• Easy features
• Cheap fees
• Single stage investment options 

These funds are run by banks or some investment companies. Anyone can join retail funds and can have a various options to invest. These are usually of low but are offered in low to high at every range.

• There are around 5-15 investment options available to the employees
• Funds are accumulated
• Long term investors can gain defined benefits
• These funds are available at low fees. 

SMSFs come with self managing control on funds but with more responsibility as well as workload. This is suitable for people who have super skills to manage financial and legal terms (McIntyre, T.M. (2016). It is the largest of all funds with 99% of the total number of funds (RiceWarner 2014). 

SMFs property investment 

SMFs allow to purchase real estate in residential sector ( Ambachtsheer K., Capelle R., Lum H., (2006) 

Individuals can withdraw superannuation fund when he fulfils all the conditions laid down by schedule 1 of superannuation industry regulation 1994(Journal of Applied Finance, Spring/Summer 2008.) 

Importance of superannuation  and expected Growth in superannuation assets 

Australians are going to live a healthy and longer life that means you will need a big fund after your retirement. People cannot only rely upon pension schemes. In Australia if you are working under someone then your employer will contribute 9.5% of your salary a part from your salary to your superannuation guarantee fund, fund the one which is chosen by you or suggested by your employer or financer. 

• Retirement could last a long
• Pension could not be sufficient
• Insurance cover
• Great tax benefits  

Expected growth in funds 

Country is expecting a rapid growth in superannuation assets from now to 2035 in various sector corporate, self managed, public sector, industry, retail, and retail employer sponsored sectors (Choonara, J. (2009),). 

Long term growth of Australia hinders on productivity performance. Key drivers are competition and innovation (OECD (2006). There are various gaps to the system.

1. Sustainability: climate change and other environmental issues like water issues demonstrates bio-physical forces that are big challenges to be faced in near future.
2. Technology advancement: world is getting digital. There is a rapid transformation in technology day by day that cannot be predicted.
3. Demographic shift: Australia’s population is getting older and our focus is old people of aged above 65 years which is going to be rise from 13.5% to 22.7% in 2050. Health care facilities, and other amenities is a big challenge.
4. Shift in global economic weight: middle class population in Asia pacific is expected to grow very fast, so this is a big challenge to overcome.

• Volatility in world economy
• Structural change
• Productivity
• Fiscal unsustainability 

Australia has faced global financial crisis in 2007. But Australia was the least escaped country all over the world. Australian banking sector was also very less affected. Rather there have been continuous fall in financial companies from market practices and investment funds. Again in 2009 market fall by 41% from the peak point of November 2007 creating huge losses for investors and pension fund sector (APRA 2007). 

Australia was the second biggest issuer of pension securities and funds. Problems of investor’s protection arrangement and margin lending were mentioned in order to failure of the market. Many funding banks faced fall in goodwill as they were not sufficient to provide funding and not providing services.

There were many reasons of continuous financial crisis. Firstly the crisis was neglected by the economists. Secondly, there were many issues which remain unsolved among economists and political leaders (APRA 2009). 

Setting clear objectives for the system of superannuation:

Government should focus to develop such system to strengthen the objectives of the superannuation guarantee scheme within the law of government in 2016(Treasury 2001). 

By the end, government must intend to introduce a system which works efficiently and effectively with allocating new employees or staff to fund schemes. 

Government should extend the choice option of fund to more employees even to those who cannot choose their option of superannuation funds due to some legislation rules. 

Government should progress the retirement income of the employees and support the CIPR (comprehensive income products for retirement).  

Government should agree practicable and cost effective fund schemes for superannuation of employees. 

Financial advice: 

• Financial interest of firms and consumers should be aligned
• Government should focus to use a differ approach for superannuation schemes with life insurance firms. Government should propose to support retail life insurance industry with legislation and regulatory firms.
• Government must support Australian securities and investment commission after going through structure of remuneration in mortgage and broking sectors. 

Professional advisers will be developed by the legislation in 2016 by giving them adequate qualification, and professional training. 

Financial advice:

• General advice should be provided to consumer in order to alleviate misunderstanding.
• Legislations needs to be developed to financial advisers and mortgage brokers.   

References:

OECD (2006), Guidelines on Pension Fund Asset Management: Recommendation of the Council.

ABS.(2007). Employment arrangements, retirement and superannuation, Australia Apr to Jul 2007 (Re-Issue). (Cat. No.6361.0). Canberra, Australia: Australian Bureau of Statistics. .(Accessed: 20 May 2016)

ABS.(2009). Employment arrangements, retirement and superannuation, Australia Apr to Jul 2007 (Re-Issue). (Cat. No.6361.0). Canberra, Australia: Australian Bureau of Statistics(Accessed: 20 May 2016)

The Treasury.(2001). Towards higher retirement incomes for Australians: A history of the Australian retirement income system since Federation. Canberra, Australia: The Australian Government the Treasury(Accessed: 20 May 2016).