A look Down Under, where the workplace retirement system is an all-DC “super”
March 2, 2023
While here in Canada it’s up to employers to decide whether or not to offer a retirement program, Australian employees are covered by an all-defined contribution (DC), all employer-funded system of superannuation funds, or “supers.”
This Australian superannuation system now has more than $3 trillion (Australian) in retirement assets under management,
Save with SPP reached out to the Association of Superannuation Funds of Australia (ASFA) by email, and ASFA’s CEO, Dr. Martin Fahy, was kind enough to provide answers to our questions on how retirement savings are handled down under.
Q. Does the Australian superannuation system involve mandatory pension plans for all workers, with contributions made exclusively by the employer? And without any contributions from either the government or (required) contributions from individuals? (we are imagining that employees might be allowed to top up the contribution to their supers).
A. Yes, the Australian superannuation system requires employers to make mandatory contributions (known as Superannuation Guarantee contributions) to their employee’s superannuation. Currently, 10.5 per cent of wages are paid by the employer to superannuation. Individuals can make additional contributions (both before and after tax) within limits/caps prescribed by government.
Not all workers are covered by the system. For example, self-employed individuals and some contractors (dependant on the nature of the work arrangement) do not receive Superannuation Guarantee contributions.
Q. Thinking of things like the pooling of investments and the lower management fees large funds can charge, what are the chief advantages of the DC model? Can people move from job to job without transferring their supers or are transfers simple to make?
A. Individuals can choose to keep their super in the same fund when they move roles – it is not tied to their employer.
Access to professional investment management at wholesale rates, and the ability to participate in investment opportunities that would otherwise be unavailable to individuals, is one of the chief advantages that a scaleable DC model provides. Australia’s DC system is characterized by strong governance, regulation and prudential oversight. Retirement outcomes are dependent on the level of contributions (which are mandatory and the rate of which is increasing) and investment performance over time (with funds required to meet annual performance benchmarks to continue operating). Workers are not exposed to more extreme problems that have arisen in some defined benefit (DB) systems, such as reductions (or in the worst cases eradication) of workers’ entitlements due to failures in assets/liability matching or fiscal tightening.
Recent changes to the Australian system “staple” a worker to their superannuation fund, so that they maintain a single fund unless they choose otherwise (either to switch to a new fund or maintain multiple funds). This alongside other reforms and higher levels of consumer awareness has reduced account proliferation and the incidence of unintended multiple accounts being held by individuals. This will lead to reductions in fees paid by individuals and improve long-term retirement outcomes.
Q. This system appears to have succeeded on many fronts, but the percentages of Australians with pension coverage must be close to 100 per cent. If this is true (probably the best coverage in the world), what are the other great things about the Australian super model?
The Australian retirement income system is a “three pillar” system:
- Pillar 1 Government funded Age Pension
- Pillar 2 Compulsory superannuation
- Pillar 3 Voluntary savings (both inside and outside of superannuation)
As the superannuation system matures (that is, as more individuals have had the benefit of superannuation at higher contribution rates for their entire working life) the role of compulsory superannuation in providing retirement income is becoming primary. Most retired Australians today still receive some form of means tested government-funded Age Pension (a safety net payment set around the poverty line), however this is increasingly a part-pension due to higher levels of superannuation savings. One of the most remarkable (current and projected) achievements of the Australian superannuation system is its role in maintaining Age Pension payments around 2.5% of GDP over coming decades, well below what is being spent by international counterparts.
Q. Here in Canada, funds in a registered DC plan must, by the time the plan member is 71, either be converted to a life annuity or transferred to what is called a registered retirement income fund, a fund that mandates annual withdrawals (minimums). Taxes are deferred until the withdrawal stage. How does Australia handle decumulations? Are there rules similar to that?
A. There is no compulsion to convert to an annuity or allocated pension. However, there are incentives in place within the system to encourage this (for example, a zero-tax rate on investment earnings in pension phase, vs a 15 per cent rate in accumulation phase). The previous government legislated a Retirement Income Covenant that requires superannuation fund trustees to consider their retirement phase offerings and make them appropriate for their members. Last year funds submitted their initial strategies to the prudential regulator on this front and are now in the process of updating products and services in line with this.
Once in pension phase there are minimum withdrawal requirements. This is one mechanism to ensure that accrued savings are utilised for their intended purpose – retirement income that enables individuals to live a comfortable retirement.
Our thanks to Dr. Fahy and ASFA for their time and help. Here’s a link for more information on Australia’s superannuation system.
If you don’t have an employer-sponsored retirement program, or want to augment what you have, the Saskatchewan Pension Plan may be a program worth investigating. As an open DC plan that is not sponsored by your employer, SPP shares some similarities with the Australian system — it’s a large, pooled fund, which keeps investment management costs down, and as in Australia, portability is built in when you change jobs — you won’t have to transfer your benefits from one employer-sponsored plan to another. Check out SPP today!
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.
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