STYLES OF SUPER
Broadly speaking, superannuation is structured in one of two styles
– defined benefit or accumulation.
- Defined benefit: The benefit to be paid to the member is defined
in advance of the member’s retirement and is usually calculated
based on a formula which takes into account the person's years
of employment and salary at retirement. It may be expressed as
a proportion – perhaps two thirds or 75% – of the member’s salary
on retirement, redundancy or resignation. It is generally the
employer that carries the investment risk, not the member.
- Accumulation: Members in accumulation arrangements – also known
as defined contribution – are entitled to the total of employer
and other contributions put into their super accounts, adjusted
for investment earnings (positive or negative), less any taxes,
fees, charges or other expenses. Members bear the investment risk.
Both styles have a unique set of characteristics that influences
the way contributions are made and how any investment gains the
fund makes are treated.
Most superannuation funds in Australia are accumulation style.
As the accumulation structure has risen in popularity over the past
decade or so, the number of defined benefit arrangements has tapered
off. Some super funds provide a hybrid of accumulation and defined
TYPES OF SUPER FUNDS
There are five main types of super funds in Australia:
- Public offer funds (also known as ‘retail funds’) – are open
to the public and run by financial institutions. They allow a
large volume of people and/or companies to operate their super
arrangements as a single group.
- Employer or corporate funds – are open to people working for
a particular employer or company and are usually tailored to meet
the requirements of the particular company and its employees.
- Public sector funds – are provided by Government for public
- Industry funds – are open to people working in a particular
industry or under a particular industrial award, although some
industry funds are 'public offer' and allow anyone to join.
- Self-Managed Superannuation Funds (SMSFs) – also known as Do
It Yourself or DIY funds, these cater for individuals who want
to create and operate their own super fund, although they must
do so according to strict legal and regulatory requirements. SMSFs
have fewer than five members, all of whom must be trustees or
alternatively, directors of a corporate trustee. SMSFs are generally
unsuitable for people with relatively modest amounts of money
to invest or those who don’t want to assume responsibility for
the trustee role.
Did you know?
A Retirement Savings Account (RSA)
is an alternative to a super fund. It is a type
of account offered by banks, building societies,
credit unions, life insurance companies and prescribed
financial institutions. RSAs guarantee that you’ll
get back at least what you put in so they tend
to invest in conservative investments with returns
similar to that of a bank account or term deposit.
While they may be suitable for a short time, RSAs
may not be appropriate over the longer term. You
should speak to a financial adviser to determine
whether these products suit your needs.
Before choosing a fund, consider your personal
circumstances and take some time to understand the rules
of the super fund, what benefits are offered and how
your super might be affected if you change jobs or working
hours. Moving from your current fund to a new fund may
not best suit your needs.
Consider comparing two or more funds
side by side by drawing up a table and writing
the relevant attributes in columns beside each
other so you can make a direct comparison.
Checklist' can assist you to identify the
attributes that are the most important to you.
CHOOSING A FUND
Since July 2005, millions of Australians have been
able to choose which fund they would like to direct
their compulsory employer superannuation contributions.
Under the Government’s ‘Choice of Fund’ rules you’re
eligible to choose your super fund unless:
- your super is paid under certain State awards or
- your super is paid under a Federal workplace agreement
(e.g. a collective agreement or Australian Workplace
- you’re a Federal or State public sector employee
excluded from choice by law or special regulations,
- you’re in a particular type of ‘defined benefit’
fund or you’ve already reached a certain level of
benefit in that fund.
Speak to your employer or visit www.superchoice.gov.au
if you are unsure whether you are entitled to ‘choice of fund’.
Employers with employees entitled to choose their fund must
give their employees a choice of fund form when they commence
employment, and also allow them to make a choice once every
year. To choose a fund you will need to complete the choice
form and provide all required details in writing. The fund
must comply with the Government's rules on supernannuation
and your employer must be able to make contributions to that
If you don’t want to choose a fund, your employer will contribute
your super money into a fund which they choose. This fund
may not necessarily be the most appropriate fund for you.
If you do make a choice or are wondering whether you should
change your fund, there are several issues worth thinking
about. Even though everyone’s requirements for a super fund
are slightly different, the “Super Checklist”
can help you put things into perspective.
Did you know?
The Super Fund Lookup service contains publicly
available information about super funds that have
an Australian Business Number (ABN). Super Fund
- Real time data on the status of a super fund
and its contact details
- Information on the taxation implications of
making investments with a super fund
- Access to further information about super
Super Fund Lookup includes funds regulated by
the Australian Taxation Office and Australian
Prudential Regulation Authority. It is available
"SUPER CHECKLIST": 10 KEYS TO MAKING AN INFORMEDS CHOICE OF FUND
Types of Funds:
Each type of super fund can tend to have its own traits which
some might perceive as strengths and others as weaknesses. For
example, a SMSF to one person might offer autonomy and greater
investment flexibility, but to another person, the responsibilities
and risks of running a fund might be far too onerous. A retail
fund might seem to one person to have too many investment options,
while another person sees the fund as particularly attractive
because it might provide unique services and flexibility.
Compare the sorts of product features provided by the fund
and decide which features are important to you. For example,
you might want a fund where you can open an account for your
spouse and make spouse contributions or you might want a fund
that offers attractive retirement income stream options through
Compare the investment options available in the fund. What
sort of investment option suits your ‘risk profile’? How much
flexibility do you want to change your investment choice, tailor
your options or blend options? For example, you may want to
be quite selective with your investments and have more of your
super in a certain asset class, such as Australian shares. This
is important if you have other investments as it will help you
‘diversify’ your investments. Some funds give a lot more choice
Check whether your employer will contribute more to one particular
fund or offer higher benefits in one fund. Check whether you
can take advantage of the Government’s Super Co-contribution
Compare the insurance cover offered by the fund. Does the
fund provide ‘automatic acceptance’ insurance cover up to a
certain level? What does it cover you for and at what cost?
If you change funds or no longer have an employer contributing
on your behalf, what does this mean for your insurance cover?
You wouldn't want to find yourself without cover.
Fees and Costs:
There will be a variety of potential fees and charges in each
fund. Consider things like the annual administration fee, investment
management fees and other fees, such as expense and service
fees, which may be payable by you if you want to change investment
options, transfer to another fund or roll-over to another super
fund and terminate your membership with your current fund. Super
funds must show all significant fees in a table in the fund’s
Product Disclosure Statement (PDS).
Since superannuation is a long-term investment, you should
examine investment performance over at least a five year time
frame. Look at what sort of track record the fund has, although
keep in mind that past performance is no guarantee of future
Awards or ratings:
There are a number of industry associations, research houses
and ratings agencies which evaluate super fund activities or
rate funds on particular criteria. You might find it worthwhile
to hear what others are saying about your potential fund – but
you should make sure that any fund rating is comparing ‘like
Complying and licensed:
Confirm the superannuation provider is adequately licensed
and complies with super rules and regulations. If the fund is
complying, your money will benefit from tax concessions. Individual
funds must be able to provide evidence of whether they are complying.
For more information about the super fund, check the Super Fund
Lookup service at www.abn.business.gov.au.
Some funds offer more flexible or extensive member services
than others. For example, some funds might offer discounted
or free access to financial planning services. Other funds might
provide access to other benefits, such as discounted health
insurance or home loans. Some funds might offer more extensive
Internet-based access and tools. Look at the sorts of services
on offer and consider what is attractive or important to you.
Would you get value out of a few 'bells and whistles' or would
you be happier with a more basic offering?