Superannuation – Pension Programs For Australian Employees

Overview of Superannuation Fund

Creation of pension program by an organization to ensure payment of pension to the employee of the organization consequent to their retirement from the organization can be defined as superannuation. Australian Government has made it mandatory for employers to contribute into the superannuation fund to discharge employees’ obligation in the future.  

Superannuation fund is created to meet the future obligations of an organization towards discharging the liabilities of pension payment to the retired employees in the future. Also referred to as salary sacrifice arrangement due to the contributions made to the fund by the employees from their gross salary for future benefit in the form of pension (Cummings, 2016).   

Pension programs referred to as superannuation will be created and maintained with the contributions from employees and employers. A certain percentage of gross salary and wages of the employees are contributed to the superannuation fund with the employer contributing equal or larger amount in the fund to ensure that the superannuation fund will have necessary funds to meet the future obligations. The contributions of employers is compulsory in the fund whereas for employees it is generally voluntary. Since July 01, 2014 the rate of contribution of employers to the superannuation fund has been 9.5% and the employers are under obligation to contribute such amount to the superannuation fund over and above the amount of salaries and wages paid to the employees (Bird, Foster, Gray, Raftery, Thorp & Yeung, 2016). Australian Government has decided to gradually increase the compulsory contributions to the superannuation by the employer to 12% by the end of 2025 with the gradual increase in contributions starting from 2021.     

Contributions to the pension program are paid quarterly with first quarter starting from July 1 and ending on September 30. The quarterly contributions to the superannuation fund must be paid on or before the due date for the respective quarters. The table below contains the due date of payment of contributions to the superannuation fund (Gitman, Juchau & Flanagan, 2015).

Respective quarters Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Date of respective quarters	Due date of contributions
First quarter	July 01 to September 30	October 28
Second quarter	October 01 to December 31	January 28
Third quarter	January 01 to March 31	April 28
Fourth quarter	April 01 to June 30	July 28

The obligation of employers in respect of superannuation fund:

Employers in Australia must follow certain rules while maintaining superannuation fund to ensure that they are complying with the Government rules and regulations in for managing superannuation fund. The following are the key rules which employers should follow to keep the superannuation obligation under control (Chardon, Freudenberg & Brimble, 2016).

All employers must make the super guarantee contributions to the pension program. The payment shall be made to the nominated fund of the employees on or before the due date.

Legal Obligation of Employers towards Superannuation

The employees must be offered to choose a fund:

The employers must allow the employees to nominate suitable superannuation fund as per their requirements (Anderson, Clark, Ramsay & Shekhar, 2017).

Standard choice form must be provided:

The standard choice form shall be filled by the employees to make their choices as to the particular superannuation fund clear.

No attempt by the employer to influence the employees of choice of fund:

The employers shall not take any steps to influence the employees’ choice of superannuation fund.  

Calculation of income correctly:

The contributions to the superannuation funds are dependent on the income of the employees thus, the calculation of employees’ salaries and wages must be calculated correctly to ensure that the amount of contributions are made correctly (Gerrans & Yap, 2014).

Records must be properly kept:

All records in relation to the superannuation contribution and salaries of the employees must be kept properly.

Employees shall be informed:

The payslips of the employees and workers shall contain all information about the contributions made into the superannuation fund to keep the employees informed about the contributions into the fund (Meir, Mugerman & Sade, 2016).

Providing necessary assistance to the employees in regards to salary sacrifice subsequent to request:

The employers are allowed to assist the employees to strengthen their superannuation fund if such requests are made by the employees.

Tax file number submission as per requirement:

Employee’s tax file number must be submitted to the superannuation fund managers for authorization purposes. The tax file numbers must be submitted earlier of the following:

1. Date on which first superannuation contribution was made for an employee. Or
2. Within 14 days subsequent to receiving TFN number by an employee if it was not available at the time of first superannuation contribution (Hellwig & McAllister, 2018).       

Tax benefits of superannuation accounts:

Contributions paid into the superannuation funds are allowed as deductible expenditures in computing the taxable income of an employer. Thus, the contributions made by the employers will be considered as expenditures of business in computing the taxable from of profit of such business.

In order to encourage the employees and employers to contribute significant amount of money into the pension program the government has introduced number of taxation benefits including deductibility of contributions of the employers in computing taxable profit from a business. Apart from that employees at the time of withdrawing super benefits if follow appropriate rules and regulations the rate of tax on such withdrawal can be reduced significantly (Camilleri, Cam & Hoffmann, 2018).

Three Australian superannuation providers:

ANZ Wealth:

ANZ Wealth offers different types of pension plans to the employees with simple and flexible rules to grow the superannuation fund.

Tax Benefits of Superannuation Accounts

ING:

Branchless banking services are provided by ING in all across Australia. It is also provides number of accounts for pension programs.

Commonwealth Bank Super:

One of leaders in providing different types of financial services in Australia, Commonwealth Bank also provides superannuation schemes for the employees in the country.  

Smart choice super: Smart choice super allows the employees to make smart choices as per their requirements.  

Self-managed super: Employees are allowed to manage such funds as per their requirements.

Employer based super: Employers offer the choices to employees in this scheme.   

Life-stage scheme: Entire life stage scheme by Commonwealth Bank of Australia.  

Share option: In this plan the employees are allowed to use share option.  

Cash deposit: The cash deposit super is one of most popular superannuation fund of Commonwealth Bank (Niblock, Sinnewe & Heng, 2017).

Living super: ING’s Living super helps the employees with higher pension requirements to invest in the plan.

Safe: Employees with relatively low earnings will prefer the safe scheme of ING.  

Smart: With smart choice employees can meet their requirements after retirement.  

Historic return on these funds are as following:

Products	Historic average return (Assumptions where data have not been  found)
Decades	1940s	1950s	1960s	1970s	1980s	1990s	2000s (Six months)
Smart choice super	4.48	6.65	8.27	9.26	9.81	9.92	3.24
Self-managed super	2.28	4.4	3.8	5.7	6.5	4.1	2.24
Employer based super	2.21	1.12	4.38	2.6	3.8	4.67	2.72
Life-stage scheme	5.65	6.5	6.4	7.5	5.7	6.8	3.23
Share option	4.97	4.28	5.27	2.8	4.89	6.67	2.28
Cash deposit	3.28	3.39	3.48	4.48	4.57	5.27	3.19
Living super	7.65	7.86	8.24	9.91	9.93	10.12	4.48
Safe	2.28	2.34	2.56	2.78	3.12	3.45	1.78
Smart	3.89	4.86	5.84	5.97	6.12	6.67	3.11

The above chart shows that most of the products have followed a same trend as far as historic average returns are concerned. It is due to the fact that the superannuation products are operating in the economy under free market conditions thus, the conditions in the market affects all the products equally (Gupta & Jithendranathan, 2015).

It is clear that Living super of ING has performed best out of the 9 products discussed here as the average returns in different decades are highest for the product compared to other superannuation fund. Employer based super and safe products have been the worst when it comes to average return on the funds invested (Watson, Delaney, Dempsey & Wickramanayake, 2016).

Mean, minimum and maximum returns of these superannuation funds are provide below:

Products
Decades	Mean	Minimum	Maximum
Smart choice super	7.375714	3.24	9.92
Self-managed super	4.145714	2.24	6.5
Employer based super	3.071429	1.12	4.67
Life-stage scheme	5.968571	3.23	7.5
Share option	4.451429	2.28	6.67
Cash deposit	3.951429	3.19	5.27
Living super	8.312857	4.48	10.12
Safe	2.615714	1.78	3.45
Smart	5.208571	3.11	6.67

Calculation of salary:

Year	(A): Annual salary  ($)
26th Birthday	61,800.00
27th Birthday	63,654.00
28th Birthday	65,563.62
29th Birthday	67,530.53
30th Birthday	69,556.44
31st Birthday	71,643.14
32nd Birthday	73,792.43
33rd Birthday	76,006.20
34th Birthday	78,286.39
35th Birthday	80,634.98
36th Birthday	83,054.03
37th Birthday	85,545.65
38th Birthday	88,112.02
39th Birthday	90,755.38
40th Birthday	93,478.04
41st Birthday	96,282.39
42nd Birthday	99,170.86
43rd Birthday	102,145.98
44th Birthday	105,210.36
45th Birthday	108,366.67
46th Birthday	111,617.67
47th Birthday	114,966.20
48th Birthday	118,415.19
49th Birthday	121,967.65
50th Birthday	125,626.68
51st Birthday	129,395.48
52nd Birthday	133,277.34
53rd Birthday	137,275.66
54th Birthday	141,393.93
55th Birthday	145,635.75
56th Birthday	150,004.82
57th Birthday	154,504.97
58th Birthday	159,140.11
59th Birthday	163,914.32
60th Birthday	168,831.75
61st Birthday	173,896.70
62nd Birthday	179,113.60
63rd Birthday	184,487.01
64th Birthday	190,021.62
65th Birthday	195,722.27

Annual salary of 26^th birthday has been calculated by multiplying the amount of salary of 25^th birthday by 103%. Similarly the salary of 27^th birthday has been calculated by multiplying the annual salary of 26^th birthday with 103% and so on (Cheah, Foster, Heaney, Higgins, Oliver, O’Neill & Russell, 2015).

Annual contribution in the superannuation fund between 26^th and 65^th year:

<table>

Year	(A): Annual salary	Superannuation contribution @9.5%
26th Birthday	61,800.00	5,871.00
27th Birthday	63,654.00	6,047.13
28th Birthday	65,563.62	6,228.54
29th Birthday	67,530.53	6,415.40
30th Birthday	69,556.44	6,607.86
31st Birthday	71,643.14	6,806.10
32nd Birthday	73,792.43	7,010.28
33rd Birthday	76,006.20	7,220.59
34th Birthday	78,286.39	7,437.21
35th Birthday	80,634.98	7,660.32
36th Birthday	83,054.03	7,890.13
37th Birthday	85,545.65	8,126.84
38th Birthday	88,112.02	8,370.64
39th Birthday	90,755.38	8,621.76
40th Birthday	93,478.04	8,880.41
41st Birthday	96,282.39	9,146.83
42nd Birthday	99,170.86	9,421.23
43rd Birthday	102,145.98	9,703.87
44th Birthday	105,210.36	9,994.98
45th Birthday	108,366.67	10,294.83
46th Birthday	111,617.67	10,603.68
47th Birthday	114,966.20	10,921.79
48th Birthday	118,415.19	11,249.44
49th Birthday	121,967.65	11,586.93
50th Birthday	125,626.68	11,934.53
51st Birthday	129,395.48	12,292.57
52nd Birthday	133,277.34	12,661.35
53rd Birthday	137,275.66	13,041.19
54th Birthday	141,393.93	13,432.42
55th Birthday	145,635.75	13,835.40
56th Birthday	150,004.82	14,250.46
57th Birthday	154,504.97	14,677.97
58th Birthday	159,140.11	15,118.31
59th Birthday	163,914.32	15,571.86
60th Birthday	168,831.75	16,039.02
61st Birthday	173,896.70	16,520.19
62nd Birthday	179,113.60	17,015.79
63rd Birthday	184,487.01	17,526.27
64th Birthday	190,021.62	18,052.05
65th Birthday	195,722.27	18,593.62

Since Living Super of ING showed highest average return hence, it has been assumed that the employee has nominated ING’s Living super. Accordingly, the balances in superannuation account would as following after each year:

Top Three Superannuation Providers in Australia

The superannuation account balance on 65^th birthday udder different superannuation fund would be as following:

Products	Balance
Smart choice super	2,014,173.85
Self-managed super	969,782.48
Employer based super	776,824.60
Life-stage scheme	1,447,049.04
Share option	1,033,620.30
Cash deposit	929,900.10
Living super	2,526,978.90
Safe	710,803.22
Smart	1,219,635.03

Graphical representation of the superannuation balance under different superannuation funds are depicted in the linear chart below:

Conclusion:

As can be seen that the decision of superannuation fund significantly affects the balance available in superannuation account hence, there is absolutely no doubt about the importance of the decision while nominating a superannuation fund for investment. Hence, it is an important choice (Bateman, Eckert, Iskhakov, Louviere, Satchell & Thorp, 2018).

References:      

Anderson, M. E., Clark, M., Ramsay, I., & Shekhar, C. (2017). Super behaviour: a note on young Australian adults’ engagement with their superannuation accounts.

Bateman, H., Eckert, C., Iskhakov, F., Louviere, J., Satchell, S., & Thorp, S. (2018). Individual capability and effort in retirement benefit choice. Journal of Risk and Insurance, 85(2), 483-512.

Bird, R., Foster, F. D., Gray, J., Raftery, A. M., Thorp, S., & Yeung, D. (2016). Who starts a self-managed superannuation fund and why?. Australian Journal of Management, 0312896217747331.

Camilleri, A., Cam, M. A., & Hoffmann, R. (2018). Nudges and Signposts–The Effect of Smart Defaults and Pictographic Risk Information on Retirement Saving Investment Choices.

Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.

Cheah, K. K., Foster, F. D., Heaney, R., Higgins, T., Oliver, B., O’Neill, T., & Russell, R. (2015). Discussions on long-term financial choice. Australian Journal of Management, 40(3), 414-434.

Cummings, J. R. (2016). Effect of fund size on the performance of Australian superannuation funds. Accounting & Finance, 56(3), 695-725.

Gerrans, P., & Yap, G. (2014). Retirement savings investment choices: Sophisticated or naive?. Pacific-Basin Finance Journal, 30, 233-250.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Gupta, R., & Jithendranathan, T. (2015). The impact of superannuation fund choice legislation and the global financial crisis on Australian retail fund flows. Financial Services Review, 24(3).

Hellwig, T., & McAllister, I. (2018). The impact of economic assets on party choice in Australia. Journal of Elections, Public Opinion and Parties, 28(4), 516-534.

Meir, A., Mugerman, Y., & Sade, O. (2016). Financial literacy and retirement planning: Evidence from Israel.

Niblock, S., Sinnewe, E., & Heng, P. (2017). A review of superannuation fund performance studies: Empirical evidence from Australia–2000 to 2014. Accounting Research Journal, 30(2), 224-240.

Watson, J., Delaney, J., Dempsey, M., & Wickramanayake, J. (2016). Australian superannuation (pension) fund product ratings and performance: A guide for fund managers. Australian Journal of Management, 41(2), 189-211.