How super works

10 January 2024
| By Super Review reporter |
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The core objective of the superannuation system is to build and preserve wealth for Australians to ensure a secure and prosperous retirement. Upon reaching retirement age, Australian fund members are granted access to their hard-earned super savings, which can supplement the aged pension, voluntary retirement savings contributions, and other sources of wealth generated during the accumulation phase. 

Retirement funds are used to support a high quality of life, providing Australians with dignity in retirement and enabling them to enjoy the fruits of their labour. 

But what specific role do super funds play in building and preserving wealth for millions of Australians? Why have super funds been charged with safeguarding wealth? 

Super funds are legally obliged to manage member funds responsibly with the purpose of growing balances at a rate exceeding inflation. This ensures members retain their purchasing power during the retirement phase and have enough savings to sustain a high quality of life. 

Super trustees achieve this objective by leveraging the expertise of investment analysts who develop suitable strategies designed to generate strong returns in accordance with a member’s risk appetite. 

Depending on the investment strategy selected by a member, their funds are invested in a pool of assets which super fund portfolio managers expect to grow in value overtime. These risk appetite categories are typically split into the following:

  • Conservative
  • Moderate
  • Balanced
  • Growth 
  • High-growth

Across all these categories, investment analysts adopt a diversified approach, which exposes member funds to a host of asset classes with varying features and benefits. Of the $2.3 trillion in investments by APRA-regulated trustees over the three months to 30 September 2023, the largest exposures were:

  • Shares (or equities), which accounted for 53.3 per cent of total assets – 21.9 per cent in Australian listed equities and 26.4 per cent in international listed equities; and 5.1 per cent in unlisted equities.
  • Fixed income (corporate and government bonds), which accounted for 20.3 per cent of total assets.
  • Cash investments, which accounted for 8.5 per cent of asset exposures.
  • Property and infrastructure, which accounted for 15.6 per cent of total investments.

Other asset classes included hedge funds and commodities, which accounted for approximately 2.2 per cent of total investments by super funds over the September quarter. 

This diversification strategy has proven successful, with the five-year average annualised return on assets (ROA) at 4.8 per cent. This ROA, however, has been impacted by recent market volatility, characterised by elevated inflation and aggressive monetary policy tightening from central banks around the world, including the Reserve Bank of Australia (RBA). When assessing growth over the past 10 years, average ROA increases to 8 per cent. 

In value terms, total assets managed by super funds have increased 30 per cent in just five years, from $2.7 trillion in 2018. Assets managed by APRA-regulated funds alone (excluding SMSFs) have grown by just under 40 per cent over the same period from approximately $1.8 trillion.

Ultimately, the performances of super funds are routinely assessed by APRA, which holds the industry accountable for below-par results. The annual performance test for super products aims to incentivise good practice, drive greater transparency, and increase consequences for poor performance. 

As part of the performance test, MySuper products – default investment products chosen by employers— and Super Choice products – trustee-directed investment options chosen by members with consideration to individual circumstances – are measured against a pre-determined benchmark. Once the results are published, regulated super funds that failed the test are required to:

  • Notify current members before a specific deadline, advising them of their performance test outcome.
  • Identify the causes of underperformance and develop and implement a plan to rectify this underperformance.
  • Assess the potential implications of MySuper and trustee-directed products (if any) failing the test on the fund and the sustainability of business operations.
  • Develop a plan, if it becomes necessary in the best financial interests of members, to close the product, transfer members to another fund/product and/or exit the industry.

APRA also releases interactive heatmaps presenting the latest performance data across both MySuper and Super Choice products.

But what’s in it for the super funds? Super trustees charge a fee either as a dollar amount or percentage of a super balance to cover administrative and operational costs. Fees may also be charged to cover insurance packages. 

Non-core benefits of super

The role super funds play in providing insurance coverage is often overlooked. In fact, most funds offer life, total and permanent disability (TPD) and income protection. ASIC’s MoneySmart website notes that most super funds automatically provide life cover and TPD insurance, with some offering default income protection insurance. 

In addition to building wealth and extending insurance coverage, Australia’s super system provides members with indirect benefits via tax incentives. Income generated through super is subject to a lower tax rate of 15 per cent (includes interest and dividends, less any tax deductions or credits), and Australians earning less than $37,000 are exempt from paying tax on their super.

Australians earning more than $250,000 per year are subject to a 30 per cent tax, however, this cohort is subject to a 45 per cent tax rate on other earnings in addition to a lump sum of $51,667 for the 2023–24 financial year. 

Meanwhile, the tax treatment of super withdrawals varies depending on whether a member chooses to be paid via an upper income stream or a lump sum. 

Payments via an income stream – incremental payments over the course of the retirement phase – are tax-free for members aged over 60 but may be subject to tax for those under the age of 60.

Lump sum withdrawals are also tax-free for members aged over 60, provided funds are withdrawn from a taxed super fund. Member earnings withdrawn from an untaxed super fund (public sector fund) may be subject to tax. For withdrawals from members under the age of 60, no tax is applied for the ‘low-rate cap’, which currently sits at $235,000. However, withdrawals exceeding the cap incur the lower of a tax rate of 17 per cent or the member’s marginal tax rate, whichever is lower.

The broad-ranging core and non-core benefits of Australia’s super system underpin the success of the regime over its 30-year history. But to maximise these benefits, Australians need to be equipped with the tools to choose the right super fund for their circumstances.

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