Accounting Superannuation in Australia

Question: Describe about the Superannuation in Australia. Answer: Introduction In Australia, superannuation refers to accumulated funds arrangement made by people in Australia to provide them retirement income. This is encouraged by the Australian government and supported with other tax benefits. Australias superannuation system is ranked with number three in the world lagging behind by Netherlands and Denmark only (Copy of home (2016)). There is a minimum standard set by the government for contributions as well as for superannuation fund management for employees. Contributions have to be made by the employer for employees a part from the salary and wages provided to the employees. Australian retirement 3 pillar system is (Australia's three-pillar system 2016): This contribution was 9.5% since July 2014 but is proposed to increase up to 12% from 2019((APRA) 2014). Tax concessions are also focused to attract for voluntary concessions. Retirement age which is currently 65 years for males and 64 years for females is to be increased to the age of 67 years. But veterans would get benefit before five years from civilians. These elements are subject to change if: Employers are ready to pay a higher percentage than a government has decided.(large companies, a good employer) Employees are eager to pay pre-tax contributions from their wages and salary packages. After tax contribution is also a way to contribute, which is $1, 50,000 cap a year or $450,000 in a period of three years. Government contributing a higher of up to $1,000 a year for low income groups. Current superannuation scheme in Australia was launched in 1992 July according to which all employers have to contribute for retirement scheme of their employees. It was started with a percent of 3% of the wages of the employees, But currently it is 9% (APRA 2016). History of superannuation funds It was first came in existence in 19th century in Australia. Superannuation was very common t use in 19th century which directly refers to the retirement benefits or we can say pension schemes. In most countries it is refereed as private pension which is known as superannuation by Australians. It is not very clear why pension is termed as superannuation in Australia but is different from what is provided by the private parties and what is provided by government as age pension. It could be stated as what the retirees get after a longer period of working life an employees gets in lump sum. Firstly it was provided by bank of Australiasia in October 1842, which was available upto 1940s the benefit of superannuation was available only to males, public sector group employees of large companies. Employer provided a small amount of benefit only and that was also not very compulsory. After 1974, 32.2% of salary and wage earners were considered for superannuation out of which 40.8% were male and only 16.5% were females. At that time superannuation was provided in the form of defined benefit funds. In order to make superannuation a universal approach, ACTU came in form and attached with the government and it was announced to pay 3% of wages and salaries of employees as superannuation by the employer to his/her employees. It changes many of lives of employees in Australia but not of all. This submission was made by in accordance to some supporting arguments: First implication was that, the workforce and population is getting old. Positive effects of last retirement benefits. Wide disparity existing in the economy as most of the population was not covered under superannuation schemes only large income groups, and male populations are getting these benefits. It was proposed that females and low income groups are also entitled to get these benefits. Size of superannuation funds Superannuation funds were $2,046 billion at the year ending 2015 in December quarter which was slightly high from the last one (Superannuation Statistics 2016). It was nearly $1 billion in March quarter of 2015 which was just increased by 6.1% at December end of the year (Works, S. (2016). Total assets were $449 billion in December 2015 which was 14.3% more from the last year. Superannuation 2016 statistics Feb 2016 Overview Type of fund Total assets ($billion) No. of funds No. of accts (June 15) Corporate 54 36 0.3 million Industry 446 43 11.3 million Public sector 354 38 3.5 million Retail 541 148 13.8 million Funds with less than 5 members 597 568,943 1.1 million Balance of statutory funds 56 Total 2,046 30.0 million Manner of investment (funds with more than four members) Manner of investment $ billion Directly invested 480 Placed with Investment Managers 677 Invested in Life Office Statutory Funds 195 Total assets 1,352 Funds with more than four members Dec quarter 2015 $ million Employer DB contributions 3,539 SG contributions 13,858 Salary sacrifice 2,009 Member contributions 5,162 Net rollovers to SMSFs 1,740 Lump sum benefits 8,157 Pensions 7,544 Contributions taxes 2,469 Earnings tax 986 Operating expenses 1,609 Net earnings 36,255 Net growth 41,586 Asset allocation (funds with more than four members) Asset class Amount ($billion) % Cash 166 12 Australian fixed interest 183 14 International fixed interest 96 7 Australian listed shares 317 24 Listed property 45 3 Unlisted property 71 5 International shares 295 22 Infrastructure 61 5 Hedge funds 24 2 Unlisted equity 62 5 Other 31 2 Total 1,352 100 MySuper funds Characteristis Amount($billion) % Cash 37 8 Australian fixed interest 51 11 International fixed interest 27 6 Australian listed shares 97 22 Listed property 9 2 Unlisted property 34 8 International shares 115 26 Infrastructure 32 7 Hedge funds 0 0 Unlisted equity 27 6 Other 15 3 449 100 Various sector of superannuation funds Types of superannuation funds In Australia there are around 500 types of superannuation funds currently operating. 362 out of 500 have total asset of greater than $50 million. Funds are totalled of $2.05 trillion in March 2015(Ato.gov.au. 2012) Superannuation fund assets My super This fund offers a new type of account. This will replace the default accounts will super funds accounts. It can be one chosen by the employee or the employer. It offers Easy features Cheap fees Single stage investment options Retail funds These funds are run by banks or some investment companies. Anyone can join retail funds and can have a various options to invest. These are usually of low but are offered in low to high at every range. Industry funds There are around 5-15 investment options available to the employees Funds are accumulated Long term investors can gain defined benefits These funds are available at low fees. Self managed super funds SMSFs come with self managing control on funds but with more responsibility as well as workload. This is suitable for people who have super skills to manage financial and legal terms (McIntyre, T.M. (2016). It is the largest of all funds with 99% of the total number of funds (RiceWarner 2014). SMFs property investment SMFs allow to purchase real estate in residential sector ( Ambachtsheer K., Capelle R., Lum H., (2006) Individuals can withdraw superannuation fund when he fulfils all the conditions laid down by schedule 1 of superannuation industry regulation 1994(Journal of Applied Finance, Spring/Summer 2008.) Importance of superannuation and expected Growth in superannuation assets Australians are going to live a healthy and longer life that means you will need a big fund after your retirement. People cannot only rely upon pension schemes. In Australia if you are working under someone then your employer will contribute 9.5% of your salary a part from your salary to your superannuation guarantee fund, fund the one which is chosen by you or suggested by your employer or financer. Retirement could last a long Pension could not be sufficient Insurance cover Great tax benefits Expected growth in fundsCountry is expecting a rapid growth in superannuation assets from now to 2035 in various sector corporate, self managed, public sector, industry, retail, and retail employer sponsored sectors (Choonara, J. (2009),). Challenges being faced by: Long term growth of Australia hinders on productivity performance. Key drivers are competition and innovation (OECD (2006). There are various gaps to the system. Sustainability: climate change and other environmental issues like water issues demonstrates bio-physical forces that are big challenges to be faced in near future. Technology advancement: world is getting digital. There is a rapid transformation in technology day by day that cannot be predicted. Demographic shift: Australias population is getting older and our focus is old people of aged above 65 years which is going to be rise from 13.5% to 22.7% in 2050. Health care facilities, and other amenities is a big challenge. Shift in global economic weight: middle class population in Asia pacific is expected to grow very fast, so this is a big challenge to overcome. Some short term challenges are: Volatility in world economy Structural change Productivity Fiscal unsustainability Australia has faced global financial crisis in 2007. But Australia was the least escaped country all over the world. Australian banking sector was also very less affected. Rather there have been continuous fall in financial companies from market practices and investment funds. Again in 2009 market fall by 41% from the peak point of November 2007 creating huge losses for investors and pension fund sector (APRA 2007). Australia was the second biggest issuer of pension securities and funds. Problems of investors protection arrangement and margin lending were mentioned in order to failure of the market. Many funding banks faced fall in goodwill as they were not sufficient to provide funding and not providing services. There were many reasons of continuous financial crisis. Firstly the crisis was neglected by the economists. Secondly, there were many issues which remain unsolved among economists and political leaders (APRA 2009). Recommendations Setting clear objectives for the system of superannuation: Government should focus to develop such system to strengthen the objectives of the superannuation guarantee scheme within the law of government in 2016(Treasury 2001). Improving efficiency: By the end, government must intend to introduce a system which works efficiently and effectively with allocating new employees or staff to fund schemes. Choice of funds: Government should extend the choice option of fund to more employees even to those who cannot choose their option of superannuation funds due to some legislation rules. Retirement income: Government should progress the retirement income of the employees and support the CIPR (comprehensive income products for retirement). Member engagement: Government should agree practicable and cost effective fund schemes for superannuation of employees. Financial advice: Financial interest of firms and consumers should be aligned Government should focus to use a differ approach for superannuation schemes with life insurance firms. Government should propose to support retail life insurance industry with legislation and regulatory firms. Government must support Australian securities and investment commission after going through structure of remuneration in mortgage and broking sectors. Professional advisers issuance: Professional advisers will be developed by the legislation in 2016 by giving them adequate qualification, and professional training. Financial advice: General advice should be provided to consumer in order to alleviate misunderstanding. Legislations needs to be developed to financial advisers and mortgage brokers. References: OECD (2006), Guidelines on Pension Fund Asset Management: Recommendation of the Council. ABS.(2007).Employment arrangements, retirement and superannuation, Australia Apr to Jul 2007 (Re-Issue). (Cat. No.6361.0).Canberra, Australia:Australian Bureau of Statistics. .(Accessed: 20 May 2016) ABS.(2009).Employment arrangements, retirement and superannuation, Australia Apr to Jul 2007 (Re-Issue). (Cat. No.6361.0).Canberra, Australia:Australian Bureau of Statistics(Accessed: 20 May 2016) The Treasury.(2001).Towards higher retirement incomes for Australians: A history of the Australian retirement income system since Federation.Canberra, Australia:The Australian Government the Treasury(Accessed: 20 May 2016).