King's Own Institute: Australian Superannuation Report, FIN200

This report provides a comprehensive analysis of Australian superannuation, exploring both investment choice and defined benefit plans. It delves into the factors influencing superannuation plan choices, including the time value of money, opportunity cost, and the impact of taxes on contributions. The report examines the amount of contributions, employer and employee roles, and the incentives provided by the Australian government. It further discusses the factors tertiary sector workers must consider when selecting a superannuation plan, such as time value of money, opportunity cost, taxes, and contribution amounts. The report concludes with recommendations for effective superannuation management and highlights the importance of a robust system for financial stability and improved retirement outcomes, while also acknowledging the current focus on accumulation and the potential risks associated with it.

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AUSTRALIAN SUPERANNUATION
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Table of Content

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s
Superannuation................................................................................................................................3
Introduction......................................................................................................................................3
Superannuation in Australia............................................................................................................3
Investment choice plan....................................................................................................................3
Defined benefit plan........................................................................................................................4
Factors Considered in Superannuation Plan Choice........................................................................4
Time value of money and superannuation...................................................................................4
Taxes and superannuation............................................................................................................5
Opportunity cost and superannuation..........................................................................................5
Amount of Contributions.............................................................................................................6
Conclusion.......................................................................................................................................7
Recommendations............................................................................................................................7
Bibliography....................................................................................................................................9

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Superannuation
Introduction
Globally, governments face a challenge in ensuring retirees live a decent life after their
retirement. In order to overcome this challenge, some governments have imposed compulsory
contribution amongst its citizens to pension funds. The funds are normally managed by super
funds that invest the funds in different investments and in return, the funds earn interest. The
contributions, therefore, grow from the point of deposit to the point they are drawn or at the
retirement of the contributor (Williams, 2018). Different incentives exist for superannuation and
these incentives differ between countries. Some countries reduce the tax liability for the savings;
this results in greater savings and better retirement for its citizen. The growth of superannuation
has seen legislation passed to govern the schemes in countries and provide arbitration channels
for those offended. Superannuation is therefore a great way to secure an individual’s retirement
by saving during the productive years.
Superannuation in Australia
In Australia, the superannuation is a partly compulsory scheme for all the citizens. Employees
have set minimum contributions to make, and the employers must contribute to the
superannuation of its employees on top of the salaries and wages they pay them (Kingston and
Thorp, 2019). The scheme allows extra contributions made by the citizens to complement the
compulsory contributions. The compulsory contribution is referred to concessional while any
contribution above the concessional is non concessional contribution. The Australian
government has created incentives for saving by giving tax benefits on amounts contributed to
superannuation. The contribution by the employer and employee were previously set at 3%, but
there has been a gradual increase in the percentage all through. This growth has been positive
despite great resistance at the introduction stage.

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Graph 1: Total government support
Investment choice plan
This is a scheme whose benefits are not known during the time of contribution. In this scheme
therefore the factor that is known is the amount of contributions made. The uncertainty in the
benefits from the scheme results from unpredictable aspects in the market like investment risks
and rate of return of investments. The plan does not guarantee a known return. The beneficiary is
in this case, responsible for the costs of holding the fund. Fund investment is done in several
financial assets. Based on the risk and the return required the employees have an option of
choosing their preferred investment (Kingston and Thorp, 2019). Over time the fund allows
money to grow or accumulate. The super value depends on the choice of investment option and
the money contributed by the employer in the form of extra deposit contributions, bonus
contributions, charged fees and the funds earned from the investment.
Defined benefit plan
The defined benefit plan is one of the most common plans for retirement in Australia and the
entire world. It is sometimes referred to as a qualified pensions plan. The employer contributes
the major part of the fund. This scheme guarantees the beneficiary defined amount since the
contribution amounts are calculated actuarially (Borowski, 2013.). The scheme, therefore, covers
the expenses, and the amount to be received certain. Due to changes in the market risks, the
contribution amount is subject to adjustments according to the prevailing conditions. The
benefits at retirement are dependent on the actuarial calculations made prior to contribution.

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Factors affecting defined benefit include the number of years worked/membership period, the
accrual rate, and the final member salary or average salary over the years (Hanrahan, 2018).
Employers do not fund each member individually but make a contribution as a whole to the
defined benefit plan. In addition to the defined benefits, individuals are allowed to make
contributions voluntarily to the superannuation fund. What makes it defined is the contribution.
Graph 2: Closer look at superannuation
Factors Considered in Superannuation Plan Choice
The important factors that must be taken into considerations by tertiary sector workers when they
are ascertaining whether to place their superannuation contribution in the investment choice or
the defined benefit plan include; the time value of money, opportunity cost, taxes and the amount
available to be contributed (Siegmann, 2011). These factors play a role in determining the
amount of benefits that vest upon maturity of the plan.
Time value of money and superannuation
In terms of the time value of money, investment should have returned that account for the time
value of money. The sacrifice made by the contributor in saving should be compensated by a
guaranteed good return. In saving therefore, the super fund should provide compensation for the
sacrifice made by the contributor in putting money in the super fund. When planning retirement,
the present value plays a very important role the cash at hand now is more important than money
promised in future, the present value is the amount needed in the account now to cover future
expenses. For a higher chance of a return, one chooses a riskier portfolio but with no guarantee
(Hanrahan, 2018). For a future value with more certainty, an individual will use more savings

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with a lower return rate. Employee contributions are invested in order to earn returns; this
facilitates growth. The ordinary time earnings determine the employer’s contributions.
Taxes and superannuation
A comprehensive income tax model is adhered to when taxing superannuation as the government
is establishing incentives for saving. Fifteen percent is the flat rate of the superannuation fund tax
income to a maximum of 9.5% of the employer contribution. This amount is tax exempt for the
contributor, but any further additions to the fund attract taxes to a ceiling amount. The
compulsory contribution by the employer is termed as concessional contribution while any
further addition is non concessional (Cummings, 2016). The Australian taxation system taxes
superannuation contributions at three points, when superannuation contribution is received at
retirement, when income from the investment fund is received and on the paid benefits by the
fund.
Contributions can either be concessional or non-concessional. Concessional contributions attract
tax deductions they include superannuation guarantee, employer contributions, and salary
sacrifice contributions. Non- concessional contributions are not taxed Sargent,Lee, Martin and
Zikic, 2013. Funds to superannuation contributions are subject to government caps since 2014
the annual cap has been $ 30,000 and $ 35,000 for employers over 49 years of age. From July
2016 the government reduced the annual before-tax limit to $ 25,000. The fund accessible is
income less allowable deductions are the taxable income of the superannuation fund (Hanrahan,
2018). Payment amounts are taxed at the normal income for social security payment recipients.
Opportunity cost and superannuation
Opportunity cost or alternative cost is the benefits lost when choosing an alternative over
another. It’s the ultimate sacrificed satisfaction from the foregone alternative. A better decision
can be made by carefully understanding the foregone opportunities (Chant, Mohankumar, and
Warren, 2014). An employee choosing a fund over other available super funds in the market is
the opportunity cost. Some contributors go beyond the concessional contribution by contributing
amounts higher than the required. Such contributors should be compensated for the sacrifice in
saving such money. Super funds should, therefore, compensate the employees for the sacrifice
made by investing in that particular fund and leaving out all the rest (Productivity Commission,

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2016). The compensation should be in the form of assurance of the safety of funds by investing
in safe investments as well as guaranteeing a good return at retirement.
Amount of Contributions
Employers make contributions to the fund at 9.5% of the employee earning consisting of salaries,
wages, commissions, and allowances with the exception of overtime. These contributions should
be made on a quarterly basis (Cummings, 2016). They attract a 15% tax deductible to the
employer and not part of the employee taxable income. Contributions can also be made
voluntarily by employees to their superannuation a tax benefit subject to a limit is applicable in
this arrangement.
Salary sacrifice is a situation where an employee requests the employer to deposit their entire
earnings to superannuation instead of paying them for the services rendered. Such contributions
are treated as a superannuation contribution from the employer for tax purposes deducted from
the employer. Since the amount contributed is excluded from the taxable income, it is highly
beneficial to the employee (Bateman, Deetlefs and Dobrescu, 2014). The employee and
employer should have a written agreement before work is commenced for the salary sacrifice
contributions to be valid. In considering the superannuation plan to adopt, the employee should
consider the amount available for saving and the stability of the job. Some plan requires that the
money be deposited to the fund at prescribed times (Stebbing, and Spies-Butcher,.2016). For
none permanently employed individuals, this plan could be disadvantageous.
For prudence purposes, anyone planning to adopt a superannuation fund should go due to due
diligence analysis of the available plans. The findings should lead them to finding the best option
in terms of security of the contribution and the return to be received at retirement or termination
(Odia, and Okoye, 2012). In making the decision on the time value of money, an employee
should consider the plan that gives the best return for the investments made. The fund should
also manage the contributions adequately to ensure their security by choosing investments with
acceptable level of risk. In considering the opportunity cost, the employee should choose a plan
that compensates for the sacrifice made in picking that particular superannuation plan. The
Best plan should also ensure the funds are safe, and the risk level accepted is conservative.

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When it comes to taxes, the employee should make use of the incentives given and apply for tax
deduction from the fund manager. Superannuation contributed from post-tax earnings are not
taxable, and the retirement benefits are tax exempt. An individual should, however, make
concessional savings and take advantage of the government incentives (Odia, and Okoye, 2012).
In considering amounts available for contribution, an employee should consider the stability of
income. Since defined benefits plan has their contributions determined actuarially, failure to
make contributions on time could affect the scheme. In this case, an individual with an unstable
source of income should consider choosing a more flexible plan to put money (Cummings,
2016). The defined benefits plans are a good investment for those with stable income and more
likely to stay with the current employer until the benefits are passed to them.
Conclusion
Retirement policies highly impact the fiscal position of any state. One of the government’s major
expenditure is retirement payments through superannuation subsidization and pension payments.
The superannuation system might seem entrusted to the private sector, but the government is also
playing a significant role. The compulsory superannuation systems have increased savings
substantially in Austarlia and ensured that citizens are guaranteed of a decent retirement package.
It is however evident that an effective and efficient scheme is essential to manage the funds and
ensure that misappropriation do not occur. By making contributions deductible during taxation
of income and the drawings free from any taxes, the Australian government is giving adequate
incentives to saving.
Financial stability has been enforced through a large pool of stable superannuation assets. Future
wellbeing improvement and great retirement outcomes are the key objective of any pension
scheme; when an employee contributes, they expect enough income flow after retirement that is
sustainable and adequate from an integral system. At the moment the accumulation face seems to
be getting more focus, therefore, posing a risk on whether the scheme will be sustainable in the
future. However, these policies seem to be more beneficial to high-income earners due to tax
expenditures associated with concessional taxation. Taxation should be reduced for the
investment to reach its desired goals.
Recommendations
Based on the analysis and research, Defined Benefit Plan is recommended. This is because for
the pension scheme to be more effective, the superannuation preservation ages should be aligned

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with the age pension, the age pension eligibility age should also be raised. Some people are using
their retirement savings to offset debt; this can be curbed by limiting lump sum withdrawals from
superannuation accounts. The high inequities should be dealt to ensure the low-income earners
benefit just like the high-income earners.

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Bibliography
Bateman, H., Deetlefs, J., Dobrescu, L.I., Newell, B.R., Ortmann, A. and Thorp, S., (2014). Just
interested or getting involved? An analysis of superannuation attitudes and actions. Economic
Record, 90(289), pp.160-178.
Borowski, A., 2013. Risky by Design: The Mandatory Private Pillar of A ustralia's Retirement
Income System. Social Policy & Administration, 47(6), pp.749-764.
Butler, D. and Cheung, J., (2018). Superannuation: Triggering you bring-forward NCCs cap.
Taxation in Australia, 52(8), p.438.
Chant, W., Mohankumar, M. and Warren, G., (2014). MySuper: a new landscape for default
superannuation funds. CIFR Paper, (020).
Cummings, J.R., (2016). Effect of fund size on the performance of Australian superannuation
funds. Accounting & Finance, 56(3), pp.695-725.
De Zwaan, L., Brimble, M. and Stewart, J., (2015). Member perceptions of ESG investing
through superannuation. Sustainability Accounting, Management and Policy Journal, 6(1),
pp.79-102.
Hanrahan, P.A.M.E.L.A., (2018). Legal framework governing aspects of the Australian
superannuation system. Background Paper, 25.
Kendig, H., Wells, Y., O'Loughlin, K. and Heese, K., 2013. Australian baby boomers face
retirement during the global financial crisis. Journal of aging & social policy, 25(3), pp.264-280.
Kingston, G. and Thorp, S., (2019). Superannuation in Australia: A Survey of the Literature.
Economic Record.
Odia, J.O. and Okoye, A.E., 2012. Pensions reform in Nigeria: A comparison between the old
and new scheme. Afro Asian Journal of Social Sciences, 3(3.1), pp.1-17.
Productivity Commission, (2016). Superannuation: alternative default models.
Sargent, L.D., Lee, M.D., Martin, B. and Zikic, J., 2013. Reinventing retirement: New pathways,
new arrangements, new meanings. Human relations, 66(1), pp.3-21.
Siegmann, A., 2011. Minimum funding ratios for defined-benefit pension funds. Journal of
Pension Economics & Finance, 10(3), pp.417-434.
Stebbing, A. and Spies-Butcher, B., 2016. The decline of a homeowning society? Asset-based
welfare, retirement and intergenerational equity in Australia. Housing Studies, 31(2), pp.190-
207.

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Williams, R., (2018). Managing superannuation fund investment taxes. Taxation in Australia,
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Ntalianis, M. and Wise, V., (2011). The role of financial education in retirement
planning. Australasian Accounting, Business and Finance Journal, 5(2), pp.23-37.