A clear direction for super

Australians have finally pulled their heads out of the sand and are digging deep into their pockets for superannuation. By IBISWorld’s JASON BAKER

By Jason Baker

The main driver of revenue growth in the superannuation funds industry in Australia is the growth in voluntary contributions.

IBISWorld expects voluntary contributions to continue to rise moderately in the next five years, although at a decreasing rate. Contributions are expected to increase from an estimated $83.4 billion in 2006-07 to $127 billion in 2011-12, representing an average real rate of growth of 8.8% a year.

Australia’s superannuation assets are now more than $1 trillion, having risen by $155 billion in less than a year. Most of that money has been invested by funds management firms, of which there are now reckoned to be around 150 in Australia.

Superannuation rule changes proposed in the 2006 budget are expected to lead to an increase in voluntary contributions. Deductible contributions, both employer and personal, made to superannuation funds will be concessionally taxed in the superannuation fund at 15%, which is current practice.

However, there will be an annual limit of $50,000 of deductible contributions per individual. Over this limit, contributions will be taxed in the superannuation fund at the top marginal rate.

As a transitional measure for those aged 50 or over, the limit will be $100,000 for a period of five years until 2012-13, when it will drop to $50,000. There will also be a cap on undeducted contributions made to super of $150,000 per individual each year. This cap applies from budget night 2006, but it may be extended to $450,000 over a three-year period.

So, to illustrate these changes, an individual aged over 50 may contribute $100,000 a year, up until 2012-13, and only be taxed at the 15% rate. After this time the individual will only be able to contribute $50,000 per year without being taxed at the top marginal rate of 45%. This is an opportunity that people over 50 can take advantage of.

A growing awareness of the need for Australians to contribute to their retirement savings is also expected to raise the level of voluntary contributions.

A study performed by the Association of Superannuation Funds of Australia (ASFA) in 2004-05, which was compared to a similar one undertaken three years earlier, found that more than half of the population are aware that their current savings plan will not provide for the lifestyle they expect in retirement.

In 2001-02, a third of the population believed that their current savings would provide for their retirement expectations. This figure declined to 12.5% of the population in the 2004-05 study. Furthermore, the study found that 70% of people recognise that the 9% compulsory superannuation contribution is not enough, that more people expect they will receive the age pension, and a rising number of individuals are expecting to work in retirement.

Some delusion still remains as to how the financial gap can be bridged; working in retirement is being considered by 80%, and 60% planning to sell or downsize their homes.

The recent passing of the Superannuation Act 2003 is expected to improve contributions from a socio-economic group less likely to have contributed greatly before.

Investment income is subject to market fluctuations of individual investment vehicles, and with investment income’s share of revenue expected to increase over the outlook as total funds under management grow, the increased reliance on investment income is expected to result in increasing volatility of industry revenue.

The new choice of fund legislation is believed to have given about 5.2 million employees the right to choose their superannuation fund. In comparison, before July 1, 2005, about one million self-employed and owner-managers, and another two million employees had a choice of funds.

ASFA estimates that about 8% of fund members who are able to change will want to exercise their choice of funds right, leading to an estimated gross flows between fund sectors of about 6% of fund members.

In 2005-06 total assets for the industry grew by 18.9%. With the change in attitude as Australians continue to pull their heads out of the sand on superannuation, the industry looks set to continue growing at a very healthy rate.

Superannuation fund revenue growth chart