The latest round of changes to superannuation, announced in last month's Federal Budget, has many implications for Australian workers contributing towards superannuation, in particular for those who are nearing retirement.
Employers can be an important channel for providing information and education about superannuation to their workforce. Mercer's recent studies show that people are thirsty for more knowledge about superannuation, and they will turn to their employers for this information.
Employees will appreciate access to financial education seminars and information to help them understand how the changes will impact on them - especially in the lead up to 30 June.
We take a look at the changes announced to retirement policy, including superannuation, in the budget, what they mean to employers and their employees and how companies can use this as an opportunity to boost employee engagement and financial literacy.
Age pension eligibility age increase
The current pension age was set 100 years ago and needed to be reviewed because people are living longer. In light of this, the mindset that 65 is the "age at which people will retire" needs to shift to reflect the reality that people are staying in the workforce longer.
In the budget it was announced that the qualifying age for the Age Pension will gradually increase from 65 to 67 by 2023 - increasing by six months, every two years, commencing from 1 July 2017 and reaching 67 on 1 July 2023.
This policy will encourage older workers to retain a connection with the workforce for longer and provides a good opportunity for employers to retain older workers, even if on a part time basis.
But by the same token employers will need to review working practices and offer greater flexibility. They will need to consider role design for this group who will have changing lifestyle needs and may not be physically able to perform the role they once held. Different opportunities for older workers need to be explored, such as deciding whether certain roles can be done part-time or if older workers can assume coaching and mentoring roles to give the organisation the benefit of learning from those with the most experience.
Income test for Pensioners to change
From 20 September 2009, payments to pensioners will be reduced by 50 cents for each extra dollar of private income above the 'income test free threshold'. (Currently pension payments are reduced by 40 cents for each extra dollar of private income).
This measure may encourage employees who are eligible for the age pension to continue working, even if only on a part time basis. Employers should continue to engage with their older workers to understand their retirement intentions, so that planning for the retirement of older workers is up to date and succession plans are in place and can be implemented effectively.
Instead of increasing to $55,000, the current limit of $50,000 on concessional contributions (that is contributions taxed at the lower rate of 15% including salary sacrificed contributions) has been reduced to $25,000. The transitional concessional contributions cap of $100,000 for those over 50, which applies until 30 June 2012, will be reduced to $50,000 per annum.
The annual cap on non-concessional contributions will remain at $150,000 for the 2009/10 financial year instead of being indexed.
For employers this means they will need to provide flexibility for employees to amend salary sacrifice arrangements with regard for the reduced limits applicable from 1 July 2009.
Employers who contribute more than the 9% superannuation guarantee will need to consider a review of remuneration structures for higher paid employees. These employees may benefit from flexibility to cap their superannuation contributions, but employers should be aware of implications for employees in regard to other income tests (eg Medicare Levy Surcharge). These new contribution reporting rules will increase complexity, at least in the medium term, for both employers and employees.
The Government will temporarily reduce the matching rate and maximum co-contribution that is payable on an individual's eligible personal non-concessional superannuation contributions to 100%, with a maximum co-contribution of $1,000 per annum until 30 June 2012.
Despite the temporary reduction, co-contribution system remains a valuable incentive for eligible employees to save towards their retirement.
Trans-Tasman retirement savings portability scheme
Employers who transfer employees between Australia and New Zealand will need to review their superannuation policies in relation to such transfers soon. The Government has agreed, in principle, to a trans-Tasman retirement savings portability scheme which will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds. At this stage, no further details of the scheme have been announced.
While many of the changes to super have been reported as decreasing the attraction of superannuation as a savings vehicle, it still remains an important component and one of several vehicles which individuals can use to prepare financially for retirement.
Furthermore, working Australian's engagement with super continues to increase - recent research from Mercer shows that 69% of working Australians surveyed would support an increase in the superannuation guarantee, and furthermore nearly half of these people would support a joint employer-employee funded model for this.
For employers this highlights that despite changes, the importance and relevance of superannuation is not going to diminish and therefore this is a tool in the reward strategy toolbox that can be leveraged to help differentiate as an employer and effectively reward employees, now and well into the future.
About the author
Peter Promnitz is the CEO of Mercer Asia Pacific