The Roller Coaster World of Retirement Funding
The global financial crisis, which pummelled share markets around the world, also took a heavy toll on superannuation investments.
But nest eggs were tipped to claw back to levels seen before the GFC within a year. Millions of workers with money in a typical super fund gained a 9.2% average return in the past year, according to an industry survey. This means someone with $100,000 squirreled away for retirement got a $9200 savings boost.
Now another recession threatens Australian’s superannuation investments.
Most Australians invest their superannuation money in funds with growth assets of 61% to 80%. The latest return comes on top of a 10.4% rise a year earlier. But workers still need another 6% growth to get back on level terms since the GFC rout.
In fact, Australia’s superannuation funds were among the worst performing among developed countries over the past three years, falling casualty to their love affair with shares. They logged average returns of -2.8% from 2008 to last year, with only the pension funds of recession-hit Estonia (-3.7%) and Portugal (-3.1%) faring worse among OECD countries.
After a few years of indifferent performance as a result of the GFC, superannuation is bouncing back with vengeance. But investors are now demanding more from their super funds and, as competition proliferates, they are more willing to shift to companies offering better returns, more additional options and lower fees.
With living costs escalating, super funds need to perform better in order that future retirees can enjoy a reasonable lifestyle. Nowhere is competition more sought after than in the hospitality and accommodation industries as businesses want the best for their employees and those employees seek to invest in a rewarding financial plan towards a secure retirement.
The superannuation industry is continuing to change and governments and trustees boards are being forced to make pivotal decisions about future directions and the best interests of members. As Australia’s superannuation industry continues to prepare for the upcoming MySuper environment, its three dominant players continue to be industry funds, retail master trusts and the rapidly growing self-managed super fund sector.
The Review into Australia’s Future Tax System, chaired by Ken Henry, and the federal government’s response to the review, were both released on 2 May 2010. The federal budget that followed handed down formalised the government’s response to the Henry Review and also contained a few new policy announcements that also affect the superannuation system. These included:
Increased superannuation guarantee rate – The government has announced it will increase the superannuation guarantee rate from 9% to a maximum of 12% by the 2019/20 financial year. The increases will be made in increments as outlined in the table below:
This is great news in terms of helping boost the future benefits of super fund members and increasing the payments in this phased approach and the proposed reduction to the company tax rate, should help reduce some of the funding burden on employers.
Increased super guarantee limit age – Currently employers are not required to make SG contributions for employees over the age of 70. This age will be lifted for workers, increasing to 75 years of age. This change will also begin from 1 July 2013.
Superannuation co-contribution matching rate and maximum payable – The government will permanently retain the current matching rate for superannuation co-contributions at 100% up to a maximum of $1000. In short, for every $1 an eligible member puts into super from their own money, the government will match it.
In addition, the co-contribution income eligibility thresholds will be frozen for two years (2010/11 – 2011/12). That means for the next two years the full government contribution of $1000 will apply to people with incomes up to $31,920 with the amount phasing down to zero for incomes of up to $61,920.
Additional government superannuation contribution for low income earners – From 1 July 2012, the government propose to contribute up to $500 for workers earning up to $37,000 into the individual’s superannuation fund to offset any contributions tax paid on their super contributions. The aim is to effectively reduce the tax paid on super for these workers to zero. This payment will particularly benefit Australia’s growing part-time and casual workforce.
Higher contribution cap for members over 50 – From 1 July 2012, workers aged 50 and over with total super balances of less than $500,000 will be able to make up to $50,000 (indexed) in deductible contributions into their super at concessional tax rates. This extends the current concessional contributions cap of $50,000 (which is not indexed) for those aged 50 and over, which was due to expire on 30 June 2012. This will enable those with lower super balances to catch up, and particularly benefit those who have had periods outside the work force.
The plan introduced earlier this year to ensure that lower income workers receive a tax rebate on their superannuation contributions will provide a significant boost to hospitality workers’ super savings in particular. The plan will redirect the 15% tax on contributions directly into the superannuation accounts of lower income earners, meaning their accounts will accrue more savings, earlier, subject to compound interest.
It has been estimated that the measure will beneficially impact 3.5 million Australians. The majority of recipients will be women in part-time and casual jobs, the mainstay of the accommodation industry. Many such women will have relatively low superannuation savings and the proposed rebate will provide them with a significant boost to their eventual retirement income.
The measure will come into effect for contributions made from July 1, 2012. It will first be paid in 2013-14 after individuals put in their tax return for the preceding financial year.
As the first wave of baby boomers begin their retirement, the performance of superannuation funds will be subject to very much greater scrutiny in the future.
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