As 2004 unfolds superannuation developments have generally been positive, and are good news for employees and employers, writes Ross Clare. However recent policy amendments mean a number of changes are in store for HR professionals
As 2004 unfolds superannuation developments have generally been positive, and are good news for employees and employers, writes Ross Clare. However recent policy amendments mean a number of changes are in store for HR professionals
Developments in the area of superannuation in Australia have generally been positive so far this year. Investment returns have picked up and tax and regulatory changes are also generally positive for those saving for retirement through their superannuation or drawing down on their superannuation in retirement. Of particular interest to HR professionals are proposed new contribution and cashing rules for superannuation designed to encourage greater flexibility in working arrangements for people approaching or past traditional retirement ages.
There also are changes being phased in regard to the earnings based used by some employers in regard to their Superannuation Guarantee obligations.
Investment returns
In the calendar year 2003 the average industry fund recorded around a 10 per cent annual investment return for a balanced investment option (a mix of shares, property and bonds), with the average master trust with a similar investment portfolio a little below this at just over 7 per cent. While not up to the 15 per cent annual returns of some bumper investment years in the 1990s, these were very respectable returns compared to the low or negative investment returns of the preceding few years.
A number of factors contributed to this difference in return, including differences in the proportion of assets invested in particular types of investments and differences in costs. A number of industry funds had asset allocations for international shares that were lower than for the average master trust, and a higher level of property investments. Industry funds also tended to have a higher level of hedging against movements in the value of the Australian currency, which was helpful in regard to the value of international investments during the period when the value of the Australian currency strongly increased relative to those of most countries we invest in.
Going forward, this differential in average investment returns is unlikely to be as large. Recovery in overseas share prices, stabilisation of the value of our currency, and property investment returns falling back from very high levels by historical standards has lessened the scope for strategic decisions about asset allocation to boost returns from a fund. On the other hand, most funds are sharing in the benefits of more favourable investment markets.
For instance, in the 12 months to 31 March 2004 the top performing balanced superannuation fund achieved an investment return of over 20 per cent in that year, albeit on the back of some serious underperformance compared to the market generally in the previous few years. This illustrates that asset allocation decisions which diverge from the market average can lead to either under or over-performance relative to the market in the short term, with returns tending to converge to the average over the longer term.
With most asset classes performing more or less satisfactorily there is less chance of making a bad strategic decision, and for those funds which decided to maintain more or less unchanged investment strategies over the investment and economic cycle, they are now reaping the benefits of improved markets following a period of depressed investment returns. However, funds with lower management and distribution costs and/or those with skill or luck in making successful strategic asset allocation decisions will tend to achieve higher than average returns in the future. On the other hand, more expensive funds and those that make costly strategic decisions will tend to achieve returns in the future a little below the market average.
More specifically, the average return in the 12 months to 31 March 2004 was around 14 per cent, with an average return over three years of around 3 per cent per year, an average over five years of 4–5 per cent and an average over seven years of around 7 per cent. This latter figure is what is often assumed to be the long term nominal average investment return given current inflation rates and investment in a portfolio of around 70 per cent equities and around 30 per cent bonds and other interest bearing investments. This highlights the attractiveness over the longer term of saving through superannuation, both in terms of tax and investment returns. A superannuation fund investment return after tax of 7 per cent compares very favourably with, say, a 5 per cent before tax investment return from a term deposit.
However, as ever, HR professionals should not give any personal or general advice to employees about the relative merits of superannuation or other investments unless they hold an Australian Financial Services Licence, and following the required procedures for giving advice.
However, HR professionals can point individuals to sources of information, and the websites of both the Australian Securities and Investments Commission (www.fido.asic.gov.au) and ASFA (www.superannuation.asn.au) are good starting points.
Allowing more people to contribute to superannuation
In recent years the various categories of people allowed to contribute to superannuation have been broadened, including the introduction of spouse accounts. The rule that in order to make superannuation contributions a person below age 65 needs to have worked at least 10 hours a week sometime in the preceding two years has become both less relevant and undesirable in that it has stopped some Australians from saving for their retirement in a prudentially supervised and concessionally taxed environment.
Accordingly, the Government has announced that from 1 July 2004 the work test on who can contribute to superannuation will be removed for anyone under the age of 65. Persons who become eligible to contribute to superannuation as a result of this measure also may be able to claim a tax deduction for their contributions.
Allowing work and super drawdown
Currently a person aged under 65 must retire or leave employment before they can access their super. This rule can lead to people deciding to retire prematurely in order to have access to their super. It also does not cater for individuals who may choose to reduce their hours as they get older, while still remaining with the same employer.
The Government proposes that from 1 July 2005 that people who have not retired will be able to access their superannuation as a non-commutable income stream once they reach their preservation age (which varies between age 55 and 60 depending on when you were born).
Currently people aged 65 to 74 must work at least 10 hours in each week of the year in order to make contributions, and a fund must also pay out a member’s benefits if they fail the test. This test is very stringent, costly to administer and does not accommodate flexible working arrangements, such as seasonal and irregular part-time work.
From 1 July 2004 the Government will change the contribution and cashing rules to put in place an annual work test allowing considerable week to week variations in paid work are possible without compromising the superannuation position of the employee.
Rationalising the Superannuation Guarantee earnings base
The Superannuation Guarantee legislation requires employers to provide superannuation support for their employees, namely 9 per cent of an employee’s notional earnings base. For most employees this earnings base is what they earned in their normal working hours (without payments for overtime). This is commonly referred to as ordinary time earnings.
The current legislation allows some employers to pay superannuation on an earnings base that existed back in 1991 before the SG was introduced. This has meant that some employees can be paid lower superannuation contributions than other employees in similar circumstances but who are not subject to this lower earnings base. Employees in the mining sector and some involved in sales in various industries are amongst those who have had the lower earnings base.
The Government has recognised that use of the lower earnings base can have a significant impact on the standard of living in retirement of those affected. Therefore in order to ensure all employees are treated in a common manner for SG purposes the Government has decided to remove these lower earnings bases. In the future ordinary time earnings will be the earnings base for determining SG liability for all employees. Employers affected by this change will have until 1 July 2010 to meet this requirement. The phasing in of the change reflects the fact that it will involve an increase in costs for the employers affected. However, in many cases this increase will be relatively modest.
Ross Clare is the Principal Researcher at ASFA – The Voice of Super (The Association of Superannuation Funds of Australia).
