Prior to the introduction of the "Superannuation Guarantee" in 1992 by the Keating Labor government, reasonably widespread superannuation arrangements had been in place for many years under industrial awards negotiated by the union movement between 1986 and 1988 with support from the federal government as part of a "wage-tax trade off", allowing a non-inflationary means of wage increases.
The compulsory "Superannuation Guarantee" system was introduced as part of a major reform package addressing Australia's retirement income policies. It was anticipated that Australia, along with many other Western nations, would experience a major demographic shift in the coming decades, resulting in the anticipated increase in age pension payments placing an unaffordable strain on the Australian economy. The proposed solution was a "three pillars" approach to retirement income:
Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees' income, and has been incrementally increased by the Australian government. Since 1 July 2002, the minimum contribution has been set at 9% of an employee's ordinary time earnings. The 9% is thus not payable on overtime rates but is payable on remuneration items such as bonuses, commissions, shift loading and casual loadings.
Though there is general widespread support for compulsory superannuation today, it was met with strong resistance by small business groups at the time of its introduction who were fearful of the burden associated with its implementation and its ongoing costs.
The Howard government has been criticised for its reluctance to increase the compulsory rate of superannuation. Had the compulsory rate been 15% since 1996, rather than the current 9%, total superannuation assets in Australia would be approaching $2 trillion - almost double the current level.
After over a decade of compulsory contributions, Australian workers have over $1.177 trillion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy.
Compulsory superannuation in combination with buoyant economic growth has turned Australia into a 'shareholder society', where most workers are now indirect investors in the stock market. Consequently, a lively personal investment marketplace has developed, and many Australians take an interest in investment topics.
Employers must make superannuation contributions to the employees' designated superannuation fund at least every three months. The superannuation contributions are invested over the period of the employees' working life and the sum of compulsory and voluntary contributions, plus earnings, less taxes and fees is paid to the person when they choose to retire. The sum most people receive is predominantly made up of compulsory employer contributions.
Special rules apply in relation to employers providing defined benefit arrangements. There are less common traditional employer funds where benefits are determined by a formula usually based on final average salary and length of service. Essentially, instead of minimum contributions, employers need to provide a minimum level of benefit.
Superannuation Guarantee law applies to all working Australians, except those earning less than $450 per month, or aged under 18 or over 70. Individuals can choose to make extra voluntary contributions to their superannuation and receive tax benefits for doing so.
As superannuation is money invested for one's retirement, strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment not available through Medicare.
Generally, superannuation benefits fall into three categories:
Preserved benefits are benefits which must be retained in a superannuation fund until the employee's 'preservation age'. Currently, all workers must wait until they are 55 before they are able to access these funds. All contributions made after July 1, 1999 fall into this category.
Restricted non-preserved benefits are benefits which, although not preserved, cannot be accessed until an employee meets a condition of release, such as terminating their employment in an employer superannuation scheme.
Unrestricted non-preserved benefits are those which do not require the fulfilment of a condition of release, and may be accessed upon the request of the worker. For example, where a worker has previously satisfied a condition of release and decided not to access the money in their superannuation fund.
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 - 30 June 1961||56|
|1 July 1961 - 30 June 1962||57|
|1 July 1962 - 30 June 1963||58|
|1 July 1963 - 30 June 1964||59|
|After 30 June 1964||60|
Hence, by 2025, all Australian workers wishing to access their superannuation would be at least 60 years old.
In the 2006 budget the federal government announced that the RBL would be scrapped.
Most superannuation is concessionally taxed at a flat rate of 15% at three points: on contributions, on earnings and another on the final payout. These taxes contribute over $6 billion in annual government revenue. Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income. The Federal government announced in its 2006/07 budget that from 1 July 2007, Australians over the age of 60 will face no taxes on withdrawing monies out of their superannuation fund if it is from a taxed source.
In 1996, the federal government imposed an extra 'superannuation surcharge' on higher income earners as a temporary levy to raise revenue. As part of the 2001 election campaign, the government promised to reduce the surcharge from 15% to 10.5% over three years. The superannuation surcharge was eventually scrapped in the 2005/06 budget, and has been abolished since 1 July 2005.
From January 1 2006, the government has allowed the splitting of contributions with a spouse. This allows a couple, who are members of superannuation funds, to split their contributions — personal and employer — evenly. They can thus reduce the risk of exceeding their reasonable benefit limits and therefore reduce their chances of paying a higher rate of tax on their retirement savings.
Since 1 July 2003, the Government has made available incentives of a Government co-contribution of up to $1,500 for lower income employees who make personal contributions to their own superannuation fund. Depending on individual income thresholds, the Government pays up to $1.50 for every $1 contributed.
The 2007 Federal Budget announced a one-off double payment of the co-contributions paid due to personal contributions in the 2005/2006 financial year. Lower income earners received up to $3000 co-contribution for $1000 of personal contributions in that year.
Superannuation funds operate as trusts with trustees being responsible for the prudential operation of their funds and in formulating and implementing an investment strategy. Some specific duties and obligations are codified in the Superannuation Industry (Supervision) Act 1993 - other obligations are the subject of general trust law. Trustees are liable under law for breaches of obligations. Superannuation trustees have, inter alia, an obligation to ensure that superannuation monies are invested prudently with consideration given to diversification and liquidity.
Other than a few very specific provisions in the Superannation Industry (Supervision) Act 1993 (largely related to investments in assets related to the employer) funds are not subject to any asset requirements or investment exposure floors. There are no minimum rate of return requirements, nor a government guarantee of benefits. There are some minor restrictions on borrowing and the use of derivatives and investments in the shares and property of employer sponsors of funds.
As a result, superannuation funds tend to invest in a wide variety of assets with a mix of duration and risk/return characteristics. The recent investment performance of superannuation funds compares favourably with alternative assets such as ten year bonds.
There are about 300,000 superannuation funds in operation in Australia. Of those, 362 have assets totalling greater than $50 million.
There are six main types of superannuation funds:
Retail and Wholesale Master Trusts are the largest sector of the Australian Superannuation Market
From 1 July 2005, changes to the law mean that many Australian employees will be able to choose which fund their employer's future superannuation guarantee contributions are paid into. Choice of superannuation funds allows workers to:
Superannuation funds are principally regulated under the Superannuation Industry (Supervision) Act 1993 and the Financial Services Reform Act 2002. Compulsory employer contributions are regulated via the Superannuation Guarantee (Administration) Act 1992
The Superannuation Industry (Supervision) Act sets all the rules that a complying superannuation fund must obey (adherence to these rules is called compliance). The rules cover general areas relating to the trustee, investments, management, fund accounts and administration, enquiries and complaints.
In June 2004 the SIS Act and Regulations were amended to require all superannuation trustees to apply to become a Registrable Supernnuation Entity Licensee (RSE Licensee) in addition each of the superannuation funds the trustee operates is also required to be registered. The transition period is intended to end 30 June 2006. The new licensing regime requires trustees of superannuation funds to demonstrate to APRA that they have adequate resources (human, technology and financial), risk management systems and appropriate skills and expertise to manage the superannuation fund. The licensing regime has lifted the bar for superannuation trustees with a significant number of small to medium size superannuation funds exiting the industry due to the increasing risk and compliance demands.
The Financial Services Reform Act covers a very broad area of finance and is designed to provide standardisation within the financial services industry. Under the FSR, in order to operate a superannuation fund, the trustee must have a licence to run a fund and the individuals within the funds require a licence to perform their job.
With regard to superannuation, FSR:
Four main regulatory bodies keep watch over superannuation funds to ensure they comply with the legislation: