Australian Superannuation

This document provides an overview of Australian Superannuation, including its types of benefits schemes and plans. It explains the concept of superannuation, its importance, and the regulatory bodies in Australia. The document also discusses the defined benefit plan and investment choice plan, as well as the taxation and time value of money in superannuation. It concludes with recommendations for choosing the best superannuation plan based on individual circumstances.

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AUSTRALIAN SUPERANNUATION
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Table of Contents
Superannuation................................................................................................................................2
Introduction......................................................................................................................................2
Types of Benefits scheme............................................................................................................4
Types of benefits plans....................................................................................................................5
Defined Benefit Plan....................................................................................................................5
Investment Choice Plan...............................................................................................................5
Time value of money and Superannuation......................................................................................7
Bibliography....................................................................................................................................9

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Introduction
Most governments encourage the working class to save during their working or productive
periods for their retirement or unproductive years. The savings, in most cases, grow from the
point they are made until retirement or when they are withdrawn. The savings for retirement are
referred to as superannuation. In savings plans, employers can contribute to saving plans for their
employees on top of the remuneration paid. An employee can separately contribute or contribute
together with the employer. Incentives to save more are always given to make employees
sacrifice more and save. The main aim of saving is to ensure an individual can still earn upon
retirement, which enables them to afford basic human needs like healthcare and basic
commodities like food. Superannuation is, therefore, the money saved during the working years
for retirement years.
Superannuation
Superannuation is a company’s pension plan that is set specifically to benefit its employees upon
retirement. Typically, funds deposited to superannuation account grow continuously until they
are withdrawn or retirement of the beneficiary. To encourage savings for retirement, most
governments remove tax implications on superannuation in order to encourage saving. In some
countries, superannuation contributions are compulsory while in others, it’s voluntary (Agnew,
Bateman, and Thorp, 2012). The main reason for superannuation is to ensure a stream of income
after n individual retires. The contributions are made by employers or/and employees with some
countries fixing the percentage rate of earnings to be saved. In some cases, individuals
complement the compulsory contributions with voluntary contributions. Savings in
superannuation are not drawn able unless the beneficiary retires or is diagnosed with a terminal
illness.

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In Australia, the superannuation was an arrangement by union movement that set up the
superannuation under industrial rewards in 1976. The change was later brought in 1983 by
agreement by the government and trade unions for the trade unions to forego 3% of increment in
pay. The foregone increment was to be put in a newly set up super annunciation for all
Australian employees (Bateman, 2015). The introduction, despite having great support, currently
was resisted by small businesses that were afraid of the burden that came with implementation.
Later on, in 1992, the Keating Labour government introduced a compulsory scheme in its
reforms to a retirement package. This was supported to protect the Australian Economy from an
unaffordable strain on pension payments (Ingles, and Stewart, 2017). The proposal was in three
parts for superannuation contributions by the employer, which were compulsory and branded
superannuation guarantee (SG). The second part is contributions to other investments and
superannuation funds. Lastly, a safety net designed for cases when the contributions were
insufficient was maintained by the government. The Keating Labour government intended that
compulsory employee contribution be introduced in 1997 to 1998 at 1% of their salary then
increasing to 2% 1998 to 1999 and 3% in 1999-2000 (Gruen, and Soding, 2011). The Howard
Liberal Government canceled the employee contribution in 1996 upon taking office; however,
the employer contribution grew to 9% in 2002-2003.
As of 2008, employers were required to contribute 9.5% of employees’ ordinary time earnings to
superannuation (SG). This consisted of the wages and salaries received as well as commissions
and allowance excluding overtime payments. The contribution, however, does not apply for
employees under 18 years and those whose pre-tax income is less than $450 per month or are in
full-time work for 30 hours a week, part-time or casual (Gallery, Gallery, Brown, Furneaux, and
Palm, 2011). In this case, the employer is obliged to contribute to such employees. The employer

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pays for employees above 70 years who work for more than 40 hours 30-day period. The
contributions by the employer are made at least a quarterly basis. To encourage contribution, the
employer contribution is tax exempt for the employee and subject to 15% in the super fund tax.
The regulatory bodies for superannuation in Australia include the Australian Prudential
Regulatory Authority, which is charged with compliance checks (Ntalianis, and Wise, 2011).
The Australian securities and investments commission which ensures compliance by fund
trustees. Superannuation Complaints Tribunal which provides a channel for conflict resolution
using the Superannuation Resolution and complaints act.
Types of Benefits scheme
Benefits schemes are classified according to the beneficiaries.
 The public sector funds- this is established for federal and state government. The main
examples are the Commonwealth superannuation scheme (CSS), Queensland
Government Super (Q-Super) and the Public Sector Superannuation Scheme (PSS)
 Corporate funds which was established by the medium to large private sector companies
for their employees. An example is the Westpac Superannuation Scheme.
 Multi-employer or industry funds. These funds are paid by the employer to
superannuation to employees with particular care; an example is a host plus (Nielson, and
Harris, 2010).
 Self-managed superannuation funds (SMSF) for family members who are less than five
 Small APRA funds (SAF) these are less than 5 members that are not SMSFs, for
example, small businesses.
 Retirement savings accounts, these are retirement savings accounts offered by the banks.

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 Public offer funds or retail funds that cover superannuation. They are available to the
general public, including self-employed and employers.
Types of benefits plans
Pension benefits plans can be classified according to their structure and benefits to be entitled to
the holder at retirement or termination. There are two types of pension plans the defined benefits
plan and the investment choice plan.
Defined Benefit Plan
The defined benefit plan entitles the superannuation beneficiary a known element of pension
upon retirement. The employee is required to make a contribution that is normally fixed a
percentage on salary subject to a maximum. The contributions required from the employer are
determined actuarially in order to meet the contribution amount needed to entitle the employee a
given benefit. However, these contributions may vary from time to time based on the market and
the level of risk on investments. Upon termination of service, the employer can terminate the
plan and is responsible for funding payments up to the day of termination (Gallery, Newton, and
Palm, 2011). They are not therefore responsible for funding shortfalls that result from winding
up. For this type, if plan the market determinants of investment are known and the risk is
incorporated in deciding the amount to be contributed. As a result, the employee is not
responsible for the market risk. In this type of plan, therefore, what is defined is the benefit the
contributor will get at the end.
Investment Choice Plan
This is also referred to as a defined contribution plan. In this type of superannuation, the
contributions are made, but the future benefit to the employee is unknown. The benefit in the
future is, therefore, dependent on the money put to the fund and the rate of return from the

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investments. In this plan, what is defined is the amount to be contributed. The contributions
being timely means that the contributor bears the risk of the market, which includes the risk
factor of the investments undertaken. These contributions are always funded in full (Feng,
Gerrans, and Clark, 2014). This type of plan normally gives the contributor the chance to adjust
their superannuation contribution according to their financial circumstances. In this case,
contributors who do not have stable income can contribute according to the periodic income they
earn.
Taxation and Superannuation
The federal government of Australia made changes to the taxes subjected to superannuation in
early July 2017. In order to encourage its citizens to save the government introduced some tax
incentives (Ingles, and Stewart, 2015). The tax affects both the concessional and non-
concessional contributions. The concessional contributions are a pre-tax contribution and are of
three types. SG amounts which are usually a minimum of 9.5% of earnings from employer
deposited to a super fund. Amounts paid to super fund from sacrificed salary (Bateman,
Dobrescu, Newell, Ortmannand Thorp, 2016). The personal contributions made to your super,
which one can make a deduction. The concessional contributions are up to $25,000 per annum.
This is the limit for a tax deduction, and contributions above this limit attract additional taxes.
The concessional contributions made above $25,000 roles over automatically to non-
concessional contributions. To claim a deduction, one must meet the age restrictions, write to
super fund the claim amount you intend to deduct and the super fund in return accepts your
deduction in writing. For the concessional contributions, a tax percentage is set at 15%, but for
nonconcessional contribution, concessional tax within limits is applied. On the withdrawal stage,
the pension money is not subjected to any tax

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Time value of money and Superannuation
Super funds invest the contributions of employees in investments that earn a return. The earnings
from the investments are what contribute to the growth in the contributions of the employees.
The interest earned by the contribution depends on the fund and the market returns (Feng, 2014).
Some super funds have been able to maintain a positive growth rate over a long period of time,
whereas some have experienced a rocky past. In order to decide on the superannuation plan to
adopt, the employee must consider the stability of the super fund and the interest to be earned by
the investment. A stable fund will ensure that contributions are safe, and a good return is earned
upon maturity. The interest earned, therefore, is the compensation for the time value of money to
the contributor for sacrificing immediate benefits for future benefits.
Opportunity Cost and superannuation
Opportunity cost is an economic term meaning the sacrifice made to all other alternatives by
picking a particular one. For a contributor, to a super fund, the opportunity cost is the cost of
choosing one super fund over the other, the chosen super fund should offer the best to the
contributor to cover for the opportunity cost. In order to satisfy this, Superannuation strives at
giving the fund holders the best retirement package (Bateman, Deetlefs, Dobrescu, Newell,
Ortmann, and Thorp2014). This is through prudence in investing of funds to have maximum
returns and as a result, pay good interest to the beneficiaries. This will make most employees
contribute non-concessional in addition to the concessional contributions.
The Investment Choice Plan and the Defined Benefits Plan
In order to choose between the defined benefits plan and the investment choice plan, a
contributor must critically analyze the two superannuation plans to settle on the best (Iskra,
2012). For the defined benefits plan, however, the employee must stay with the employer long

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enough for the interest to the vest. This makes it disadvantageous for employees who don’t stay
long enough. The investment choice plan is, therefore, a preferable choice in this situation. The
defined benefits plan covers all the expenses and market factors of risks, and therefore, the
benefits are fixed (Chomik, and Piggott, 2012). This makes the defined benefits plan more
admirable as contributors are more interested in a certain benefit. In terms of taxes, employees
prefer superannuation contribution as they reduce the tax liability on the income. The benefit
there justifies the reason most Australian contribute concession ally and non consensually. In
terms of the cost of capital, Australians chose to save in a super cover that offers higher returns
on their contributions. The investment in one super fund should cover the opportunity cost of
choosing that particular fund over all the rest.
Conclusion and recommendation
Most individuals desire a secure retirement with ways to afford basic amenities and care as well
as enjoy the unproductive years through holidays and other luxurious arrangements. Instead of
this, most working class Australians have chosen a super fund that they contribute to in order to
secure that future. Though most Australians do not consolidate their super funds into a single
easy and economical to operate the fund, they analyze the best between the benefits and
contribution schemes. Through analysis of the funds, an individual should pick the best fund,
which is not only secure but can offer great returns to the contributor. With the flexibility in
Australia on the movements from one fund to another, an individual should strive to consolidate
all contribution. Individual with stable jobs and income should pick the defined benefits plan as
it’s more advantageous to them compared to the investment plan. On the other hand, contributors
with less permanent jobs or unstable income should embrace the investment choice plans due to
the flexibility of the scheme. To get the best value, a contributor must analyze their individual

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situations and choose a plan that not only fits their situation but gives the best return to the
individual.
Bibliography
Agnew, J.R., Bateman, H., and Thorp, S., 2012. Superannuation knowledge and plan
behaviour. UNSW Australian School of Business Research Paper, (2012ACTL14).
Bateman, H., 2015. Structuring the payout phase in a defined contribution scheme in high-
income countries: Experiences of Australia and New Zealand. In Strengthening Social
Protection in East Asia (pp. 91-123). Routledge.
Bateman, H., Deetlefs, J., Dobrescu, L.I., Newell, B.R., Ortmann, A., and Thorp, S., 2014. Just
interested in or getting involved? An analysis of superannuation attitudes and actions. Economic
Record, 90(289), pp.160-178.
Bateman, H., Dobrescu, L.I., Newell, B.R., Ortmann, A., and Thorp, S., 2016. As easy as pie:
How retirement savers use prescribed investment disclosures. Journal of economic behavior &
organization, 121, pp.60-76.
Chomik, R., and Piggott, J., 2012. Pensions, Ageing, and Retirement in Australia: Long‐Term
Projections and Policies. Australian Economic Review, 45(3), pp.350-361.
Feng, J., 2014. The effect of superannuation tax incentives on salary sacrifice
participation. Economic Record, 90, pp.59-73.

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Feng, J., Gerrans, P., and Clark, G., 2014. Understanding superannuation contribution
decisions: Theory and evidence. Working Paper, CSIRO-Monash Superannuation Research
Cluster, Melbourne.
Gallery, N., Newton, C. and Palm, C., 2011. Framework for assessing financial literacy and
superannuation investment choice decisions. Australasian Accounting, Business and Finance
Journal, 5(2), pp.3-22.
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Gruen, D., and Soding, L., 2011. Compulsory superannuation and national saving. Economic
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Ingles, D., and Stewart, M., 2015. Superannuation tax concessions and the age pension: a
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pp.417-436.
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strategies. Australasian Accounting, Business and Finance Journal, 6(2), pp.113-120.
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