On 1 July this year, compulsory employer superannuation guarantee (SG) contributions rose from 10.5% to 11% and will continue to rise until they reach 12% on 1 July 2025. The SG was an initiative of the Hawke Labor government commencing in 1991 with a modest 3% of a worker’s salary. It was intended to increase coverage of superannuation, providing a more financially secure retirement for millions of workers and less reliance on the age pension.
The introduction of the SG was accompanied by the formation of ‘industry’ super funds to offer cheap and effective investment alternatives to the more traditional ‘retail’ funds run by insurance companies and banks that often charge hefty fees and paid commissions to their sales force. These commissions and high running costs reduced returns to policyholders, and it wasn’t long before industry funds were substantially outperforming retail funds and delivering solid returns for their members. Industry funds also started to offer value for money insurance including death and disability cover and income protection.
Over the years, conservative governments and other vested interests have tried to undermine and frustrate the operation of the SG and the success of industry funds – but to no avail. The track record of industry funds speaks for itself. Australia’s pool of superannuation savings now exceeds $3.5 trillion and is one of the most successful retirement savings initiatives in the world.
Individual fund members should take the time to ensure that their super is invested in a manner consistent with their needs and objectives. Funds offer a range of investment options from ‘conservative’ (a bias towards cash-based investments) to ‘aggressive’ (a bias towards growth assets like shares and property).
Generally, the younger you are, the more assertive your approach could be, given you have a long investment timeframe. Your returns are reinvested within the fund and enjoy the benefits of compounding interest – a mathematical phenomenon Albert Einstein called the “eighth wonder of the world”.
A useful rule of thumb when considering investment returns is the ‘rule of 72’. This simple idea enables you to determine how long it will take to double your money for a given rate of return. Divide 72 by your anticipated return to get the number of years taken for doubling to occur. For example, a return of 8% will see your money double in 9 years; a more conservative return of 5% will take just over 14 years.
Compulsory super offers a fantastic investment opportunity, so discuss your circumstances and objectives with your super fund as part of a regular review.