Shortcuts / 07 July 2021


For your dose of content broccoli this week, let’s get into superannuation. Hugely important to your future/happy retirement, a bit of a drag to think about. But don’t worry, this won’t hurt a bit… In this Squiz Shortcut, we take you through how super became a thing in Australia, how the system works, and what’s new/important to get across.

Let’s start with the basics, what is superannuation?
Superannuation is money set aside and invested while you’re working so that you’ll have money to live off when you retire. 

Great, so we can wrap it up there?
There’s a little more to it…

Ok… Where does this rip-curler of a yarn start?
The origins of super go way back to the establishment of Australia’s economy. If you were a worker in the 1800s, there was no such thing as a welfare system that looked after people in their old age until a handful of states started offering pensions for older people in the early 1900s. And then the Old Age Pension became the first payment made by the Commonwealth Government in 1909 – not long after Federation.

What did it do?
It provided for men over 65yo and women over 60yo. But there was a catch – in those days just 4% of the population was aged over 65yo. Life expectancy for men was 55, and for women it was 59yo. 

That seems a bit mean…
It’s the equivalent of making today’s Aged Pension only available to those aged over 90yo… 

So if you didn’t get a pension (if you were still alive…), what did you live on after retiring?
You had to sort yourself out.

So fast-forward a bit. Where are we at?
It’s 1974 and the Bureau of Statistics did the first national survey of retirement income. It showed 32% of the workforce was covered by a pension fund or superannuation set up through work or by individuals, And more than twice the number of workers with super were male – so women were being left behind. It also found that super was more common in the public sector than the private.  

What was done about it?
A few years after that a newly elected Hawke Government in 1983 said it supported superannuation for all workers and PM Bob Hawke, along with his Treasurer Paul Keating, brokered a deal with the unions that meant employers would pay a 3% superannuation contribution into an industry super fund in lieu of a wage rise. It didn’t affect all workers, but it was a start. 

Was it a success?
It saw the number of Aussie workers with super rise. And then from there, Paul Keating really championed the notion that all Aussie workers should have super. In 1992, after he’d rolled Bob Hawke to become PM, Keating introduced the Superannuation Guarantee.

What’s that?
It basically means it became compulsory for all employers to make super contributions for their employees. It started at 1%, rising to 2% in 1998 and then 3% in 1999. Since then, there have been reforms to allow Aussies to choose their own super fund and employers are compelled to make super payments.

So how does it actually work?
Good question. When you start a job you don’t just get paid a salary, you also receive super payments from your employer – aka the Superannuation Guarantee. As of 1 July, your employer, or you if you’re self-employed, must pay 10% of your salary into a super fund.

Does that mean less in the pocket for me?
That depends on whether your remuneration includes or doesn’t include super. That’s something definitely worth knowing when you negotiate for a new role…

Why’s that?
For argument’s sake, say they’re offering you remuneration of $100,000, you should know if that includes or excludes super because with the super guarantee, now at 10%, it’s almost $200 less a week in salary than you might have anticipated if the remuneration they’ve pitched you includes super. 

But that $200 is still mine, right?
It is. It’s just going into your super account which means you can’t get your hands on it for quite a while… 

So once the money is in your super account, what happens to it?
It’s invested by the super fund. The investment side of things is really complicated but basically, your money is pooled with other people’s super to buy and hold assets – like shares, property, cash, bonds and other fixed interest investments. And these assets – hopefully – grow in value or provide income through rent or dividends.  

Sounds risky…
As with all investing, there’s some risk involved, and the idea is the super fund has a diverse portfolio so all your super eggs aren’t in one investment basket. 

But what if a fund does lose your money? 
The funds are tightly regulated by ASIC – the Australian Securities and Investments Commission. And there are strict rules about what sort of things super funds can invest in.

So, it’s nothing to be worried about?
Never say never, but the experts say a collapse is very unlikely. And if it was, you can bet the government would be called on to help those affected.

Gotcha. Back to investing…
The way this is done can be broken down into two major types – defined benefit funds and accumulation funds.

Let’s start with defined benefit funds…
A defined benefits scheme is where your retirement benefit is determined by a formula instead of being based on investment return. It’s an older style of superannuation scheme that was common in the public sector until the 1990s and operates like a pension of sorts. They’re known for being quite generous.

So, that’s the best option?
Well, no. Many are no longer available to new members. But there are accumulation funds.

Which are?
The ones where what your employer puts in, and what you put in if you want, and the performance of the investments your super fund have made, accumulate over time.

That explains the name… And there are different categories too, right?
Yup. Most super funds fall into either retail, industry, public sector, corporate and self-managed funds.

Give me the 411…
The big difference is whether they’re run ‘for profit’ like the retail funds or if they put profits back into the scheme, like the industry funds. The arguments about what model is best is mostly about principles – supporters of the not-for-profits say they’re more geared to doing the right thing by members, whereas supporters of the retail funds say if those running it are incentivised financially by making good returns, then everyone benefits. 

Which leaves me where…
Basically, it’s up to the individual to make up their mind. There’s a lot of talk about ethical investing – what’s important to you – and, of course, how they perform financially over time.

Maybe I should just do it all myself…
You can. It’s called a self managed super fund and it’s popular among investors because it gives them more control. It also means they can add family members and others to their scheme. But it takes a bit of management and compliance. And no, it doesn’t mean you can buy a house to live in with your super – there’s something called the sole purpose test which means you don’t have direct access to the assets of the fund. 

So plenty of rules around those too…
Yup. They are still subject to the same rules around things like tax. But it is an option and one that is increasing in popularity.

What’s the deal with super and tax anyway?
There’s no easy answer to that. But the theory is it should be attractive for people to make voluntary contributions to their super – because it’s an investment in their retirement and that could take pressure off the government in future years. But it can’t be so attractive that people take advantage of it and deny the government huge amounts of revenue that they might get if you were making other investments.

So it’s a balancing act…
That’s right. After all, people need to be able to access their super when they retire without being pinged by huge taxes. 

Amen. And what’s all the talk about changes to super?
There are some big changes to super and they’ve been billed as making it easier for super members. They were passed by the federal parliament a couple of weeks ago. But the first thing to point out is the Super Guarantee rate increased on 1 July.

That’s that 10% jump right?
You’ve been listening… It was a policy from the Rudd-Gillard days, and it will see those compulsory super contributions eventually go up to 12% in mid-2025.

Why now?
Rising life expectancies, for one, and the inadequacy of many super balances. Almost 50% of Australians expect to retire with less than $200,000 in super, and just 19% of us expect to be able to retire with enough to live comfortably.

Any critiques of the change?
Critics say that employers could hold back wage increases because their compulsory super contributions have increased – so less money in pockets now. That’s an issue because people need to be spending to keep our economy ticking over through the pandemic. There’s also those in the Coalition and further afield who don’t support more money going towards super as a point of principle. They say workers should have more choice about where their hard-earned cash goes. 

Are they the same folks pushing to access super earlier?
Yup. Many say that should be an option so super holders can invest in their own futures, like buying a home. As it stands, you can’t get your super until you reach what’s called your ‘preservation age’ and retire. 

How old’s that?
It’s usually between 55 and 60yo, depending on your birth year. There’s some exceptions to that like hardship provisions, and last year the rules were bent to allow people financially affected by the coronavirus to access up to $20,000 of their superannuation early.

That would have caused a stir…
It sure did. And a loud voice in the debate was, surprise, surprise, former PM Paul Keating. As the architect of the system, he sees it as some of the most vulnerable workers being robbed of their retirement futures. He says the less people have in super now means less in returns going forward.

We’ve derailed a bit. Any other changes to super?
Yup, sorry. One of the changes is to improve investment returns by exposing what they call “dud funds”. They’ll do that with new performance tests. And there’s ‘stapling’.

Ah, what’s stapling got to do with super?
It’s got nothing to do with paper and an implement on your desk… It’ll attach workers to their super accounts so each time they switch jobs their employer doesn’t set up a new fund.

Right. Because it’s easy to end up with multiple accounts…
Yup. Which is a problem because they all have admin fees meaning it’s better – in the long term – to have just one super account. But there are some concerns with it.

Like what?
The super industry says a person who starts off in one industry (like hospitality as a bar worker in uni) will then stay with a super fund that might not be the most appropriate for a future job (like when they graduate and start work as a nurse). There’s also concern that workers will be stuck with an underperforming fund. 

So these changes make it easier to jump ship?
Yup, and people can do that by comparing super funds on the government’s new online YourSuper tool. It lists funds ranked by fees and investment returns, and it aims to help those looking to consolidate their funds if they have more than one. As for those underperforming funds…

They’ll be in trouble…
They sure will. Most superannuation products will have to run through an annual performance test. Those that fail will be required to inform members and those who are persistently in the bad books will be prevented from taking on new members.

I can hear the whip crackin’ already…
Mmhmm. And just quickly before we wrap up, the number of people who can join a self-managed super fund has gone up from 4 to 6 people per fund. That’s the one we mentioned earlier where you can make family members/partners/adult children a trustee and go your own way.

Gotcha. All up to speed?
Sure are…

Squiz recommends:

YourSuper comparison tool

ABC 7.30’s special report on the future of retirement

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