Australia’s superannuation system grew to $2.87 trillion in funds under management in the June quarter just gone.
That’s a massive amount representing 150 per cent of GDP.
Super grew at 7.4 per cent in the year to June, compared to 1.4 per cent for GDP.
Compulsory superannuation was introduced from 1992 as an industrial relations measure and contributions have build from 3 per cent to the current 9.5 per cent.
They are scheduled to hit 12 per cent by mid-2025.
The super system is made up of a range of different types of funds.
Corporate, industry and public sector funds are not-for-profit, with all returns going to members after the costs of administration and investment are taken out.
Retail funds are for-profit, which means they return part of all members’ returns to their owners [banks or other financial institutions] as profits.
Self-managed superannuation funds are owned by individuals are families [they can have up to four members] and run by trustees who are generally their owners.
SMSFs are generally owned by well-heeled people, having an average balance of $621,000, compared to the average for pooled funds of $51,000 in 2017.
Purpose of superannuation
Generally the purpose of super is considered to be to build an investment fund to help workers and businesspeople to fund their retirement in a dignified fashion and reduce reliance on the age pension.
But no formal purpose has yet been legislated and some believe that the current system still allows the wealthy to build tax-advantaged funds they would otherwise save elsewhere.
What do super funds return?
The investment performance of super is vital in determining the size of retirement balances for members.
The average growth, or balanced, fund where 80 per cent of Australians are invested, returned 5.5 per cent in the year to August, 7.7 per cent over five years and 8 per cent over 10 years.
However there is a significant difference in returns from not-for-profit and for-profit returns.
Industry, corporate and public sector funds have consistently returned more than retail funds according to Australian Prudential Regulation Authority figures.
Industry funds, the higher performers, returned 7.17 per cent a year between 2004 and 2017, while retail funds returned only 5.3 per cent.
The growth of the super system has seen Australians contributing more into super in recent years with annual net contributions now nearing $20 billion.
That is the highest amount ever, except for the June quarter of 2017 when there was a rush of people with spare cash paying into super before new rules took hold which restricted contributions.
Despite the ageing population, contributions to super are outgrowing benefit payments made as members retire.
That is because high population growth triggered by immigration and local child birth is supplying a growing number of young workers into the super system.
However as baby boomers retire, the amount of funds paid out is increasing and topped $20 billion in a manner that looks sustainable.
The only other time that level was breached was in June 2017, when wealthy investors rushed to take lump sums out of super to avoid new tax-free pension caps.
Superannuation is still a highly gendered proposition with male balances much higher than those held by women.
Women’s balances average $157,050 in the run-up to retirement, while men enjoyed balances of $270,710, 72 per cent above the level for women.
In younger age cohorts the situation was better with men in their early to mid 30s holding 29 per cent more super than their female counterparts.
But that gap widens as people age because women are far more likely to take time out of the workforce to raise children, and women’s salaries also tend to be lower than men’s across their working lives.
Currently, 23 per cent of women retire with no super, and one in three women has no super account, Women In Super found. “Men always have more super than women,” said Amanda Buckley, CEO in MIS.
Pension review
Currently the government is running a retirement incomes review that will release its first report later this month.
Vital issues that need to be examined are the position of women in super and the relationship between home ownership and an adequate retirement at a time when home ownership is sinking.
Around the turn of the century 85 per cent of retirees owned their own home. It’s fallen to 75 per cent now and will be 57 per cent in 2050 according to Rice Warner.
The interaction between the pension system and superannuation or other private savings needs to be reviewed as changes from January 2017 have made that interaction highly inequitable.
The changes saw the “taper rate” – at which pension payments reduce once an asset threshold is reached – double from $1.50 to $3 per fortnight for each $1000 above the threshold.
That has led to an incentive for retirees to spend some of their savings to get back on the pension, a situation described as “nonsensical” by Ian Henschke, chief advocate for National Seniors Australia.
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