Superannuation is employer-focused because it was constructed around awards and employment agreements, and employers made all the decisions about which super fund each company would use. But super choice will shift the focus back to individuals.
By Andrew Keevers

KEY POINTS
The main types of super funds are workplace, personal and self-managed. Workplace super funds usually have lower fees than personal super funds because members join them through their medium to large employers. The associated business volume this generates for them usually results in quite attractive wholesale fee discounts. Some workplace super funds are now public offer, which means members may be able to join as individuals to take advantage of the economies of scale they achieve through their workplace sales arrangements. The most generous super funds are called 'defined-benefit' super funds. Because they are so generous, they can be very expensive for employers, and this is why most defined-benefit funds are either shutting down or closed to new members.

Now that you understand how super choice works, the obvious question is: what fund should you join? In making this choice, it helps to first understand what types of super funds are out there, how they differ from each other, and whether you can actually join them.

Recall how modern superannuation started as part of the award system and how this meant employers paid most super contributions as part of the superannuation guarantee rules. It should therefore come as no surprise that most super funds used to only be highly involved with employers, rather than directly with individual members. This, in turn, meant super funds spent most of their time making sure each employer paid super contributions, and that employers followed the superannuation rules as laid out in industrial awards or workplace agreements.

It should also not surprise you that this led to superannuation being very much focused around employers and their administration needs, rather than around members (one of the great outcomes of super choice though is that this is changing fast). Before the introduction of super choice on 1 July 2005, it was the employer's job to choose which super fund they should pay their super guarantee contributions into, provided this fund was registered with the authorities and complied with the superannuation laws. Of course, employers could work with their employees to choose their fund openly and democratically, but they didn't have to.

But the new super choice rules will change all this. They will shift the focus to employees and their needs rather than just those of the employer, which is one of the very reasons why super choice was introduced. This employer focus may seem obvious, but understanding it will give you lots of clues about how your fund operates and sells itself, and what types of features it has. 

Using this background, we will now walk through the different types of super funds that are available, being: Workplace funds - super arranged by and through an employer. Personal funds - members choose their own super fund, which they join as individuals. Self-managed funds - super funds that members directly establish and manage themselves.

Workplace super funds

Workplace super funds are those that are available to employers, whether they are private company or public sector employers. A major feature of these workplace funds is that because they are able to take advantage of the business volume that comes from combining the superannuation buying power of a large number of employees, they often offer wholesale discount fee rates and so are generally cheaper than personal funds.
When looking at workplace super funds, there are two main ways for an employer to organise them:

• Employers can choose to operate their own funds (ie, they directly sponsor their own super fund, which the company runs for its employees). If a company runs its own super fund, it is said to run its own 'in-house' corporate fund. Examples are big companies such as Telstra, BHP-Billiton and Qantas, which all run their own very successful super funds which are as good as, if not better than, funds run by outside organisations. Federal, State and some Local Governments also directly sponsor their own super funds, which are used by their own employees, or employees of the government businesses they own and operate.
  
• Employers can arrange for an outside organisation to provide super fund services to their employees. If a company chooses to use an outside organisation to provide superannuation services, it can use either a corporate master trust or industry fund. Examples of companies that follow this model are Fairfax Publishing, which uses Mercer and Just Super, and the Australian Rugby Union, which uses BT. These company arrangements in-turn lead to four subcategories of workplace super funds:

1. In-house corporate super funds
2. Government super funds
3. Corporate master trusts
4. Industry super funds.

In-house corporate super funds
In-house corporate super funds are operated by an employer sponsor on a 'stand alone' basis, meaning the company which employs the members is also the sponsor of the super fund. The fund is usually managed by a board of trustees (directors) who are jointly chosen by the employer sponsor and the employees themselves.

In-house corporate super funds operate on a not-for-profit basis, meaning that the trustee company operating the fund does not seek to make any profit out of running the fund, and so can often charge members quite low fees. In many cases the sponsoring employer will pay many of the fund's fees directly, meaning that the fund members themselves often benefit from having to pay only marginal fees, if any, to be in the in-house corporate super fund.

Government super funds
Government super funds are very similar to in-house corporate super funds, except that the employer sponsor is the Federal or State Government, a Local Government authority, or a government majorityowned business enterprise. These funds are usually managed by a board of trustees (directors) who are jointly chosen by the employer sponsor and nominated union(s) as the de facto representatives of the employees themselves.

Government funds also operate on a not-for-profit basis, meaning the trustee management company operating the fund does not seek to make any profits and so can often charge members quite low fees. Most Government fund sponsors pay most of the fees for their super funds, and so fund members themselves pay very low fees.
These very low fees are in addition to the very generous levels of superannuation contributions paid by most government employers - most government employees receive significantly more than the basic 9 per cent superannuation guarantee level paid to private sector employees. This can make government super funds incredibly competitive compared to any other type of super fund, which leads to the broad rule of thumb that members walk away from their Government super fund at their peril.

Corporate master trusts
Master trusts are super funds operated by commercial organisations such as banking, insurance, investment management and financial planning groups. They are called master trusts because the funds are really a collection of investment options and managed funds, all held together under a single umbrella mastertrust deed.

These corporate master trusts, as the name implies, are marketed primarily to medium to large employers (sometimes called 'corporates'). Because master trusts target larger employers, they are usually able to offer volume-based fee discounts that reflect the economies of scale achievable through streamlined workplace - rather than one-on-one personal - marketing.

Industry super funds
Industry super funds are funds operated by parties to industrial awards (usually employer associations and/or unions) to provide superannuation to people who work in a common industry or group of associated industries. Industry funds are usually managed by a board of trustees (directors) who are jointly chosen by the employer sponsors and the associated unions as the de facto representatives of the employees themselves. These industry funds also operate on a not-for-profit basis, meaning that the trustee company operating the fund does not seek to make any profits, and so can often charge members quite low fees.

Personal super funds

Personal super funds are those that are available to individual consumers. Because personal super funds are sold to individual consumers rather than to larger scale workplaces, they will usually have to charge fees that are higher than workplace funds. And, because these funds are sold to individuals separately, they are usually accessed through financial advisers, who often have to explain them to consumers while also having to explain how superannuation itself works.

This means that personal super funds have higher sales and cost structures than workplace super funds as each adviser often has to play an educational and informative role for the fund members which is similar to the role played by the employer or the associated union for other types of funds. Since the adviser often has to do this one client at a time without the benefits of economies of scale, it can make the process more complex than it is for workplace super funds. Personal super funds come in two main flavors:

1. Personal master trusts
2. Personal divisions of in-house corporate, government or industry super funds.

Personal master trusts
Master trusts that are marketed primarily to individuals or small business employers are known as 'personal master trusts'. They are very similar to the corporate master trusts discussed earlier, but because a person joins them individually rather than through an employer, members do not usually receive the benefit of wholesale discount fee unless they have a very large account balance.

Personal divisions of in-house corporate, government or industry super funds
Recall the in-house corporate funds, government funds and industry super funds discussed in the section on workplace super funds. Some of the larger and more sophisticated of these funds now also have special sub-funds or divisions that let people join as individuals, rather than having to join through the employer sponsor.

They are doing this because so many of their members have joined through their workplace divisions that they can now use these economies of scale to also allow other people to join as individuals.

Because these personal divisions of in-house corporate, government and industry super funds are sold to individuals directly rather than through financial advisers, they usually also have lower fees than personal master trusts, but this is because these funds operate differently to personal master trusts.

If you want to use one of these funds and still talk to a financial adviser, you can. Just look for a fee-forservice financial adviser who will charge you no commissions. See www.selectadviser.com.au for details about how to do this.

Self-managed super funds

Self-managed super funds (SMSFs) are those where small groups of individual members, with fewer than five people, decide to operate their own fund. In technical terms, all the members of an SMSF must be trustees of the fund or they must pay a professional trustee company to provide this service. Anybody can run an SMSF, but because they can often cost several thousand dollars each year to run, they are mostly suited to people with several hundred thousand dollars in superannuation. SMSFs will be covered in more detail later in this handbook.

Public offer super funds

When the superannuation laws in the late 1980s and early 1990s were being crafted, most super funds were quite simple: they were either available directly to particular employers or they were full personal funds open to everybody. But as times have moved on, so have the ways you can join super funds. This extra flexibility usually involves the fund allowing people to join who are not part of the workplace for which the super fund was initially designed. They could be relatives of employees or long-term contractors, or they could be ex-employees of the sponsoring company who, even though they have left the company, still want to be members of the super fund.

Super funds wanting to be fully open to the public were always able to set themselves up as personal super funds; this meant subjecting themselves to the full extra licensing and compliance rules associated with running a fully open-for-business superannuation fund. But problems arose for some workplace super funds that wanted to be more open but not fully open.

Their problem was that they were quite happy to subject themselves to greater regulation and compliance as part of allowing more members to join or stay in the fund, but they didn't want to run a traditional personal super fund. In other words, they wanted to be open to more of the public, but not be open to all of the public.
Because they weren't trying to be traditional personal super funds, the Government agreed that they didn't need to go to all the extra regulatory and compliance trouble of full personal funds.

To accommodate funds in this situation, the Government developed a special category called 'public offer', which effectively meant that workplace super funds prepared to go through some extra scrutiny could open their doors a little wider, to accept relatives of members into the fund or to allow ex-employees to stay with the fund. Of course, personal super funds in being fully open to the public are automatically public offer.

The upshot of this new category is that when you are reviewing which super fund to join, you should always ask if you can actually join the fund. This is because some excellent funds are actually not public offer, and so while you may want to join them, they won't let you in. A good example is the ludicrously generous federal parliamentary super scheme, which is probably the most generous superannuation fund in Australia. The sad fact is that it is not public offer, and unless you become a federal politician, you're not allowed to join.

But a number of very good workplace super funds, particularly some of the larger and top-performing industry funds and selected government super funds, are now opening their doors and becoming public offer, so it often pays to ask if they will let you in.

Defined-benefit super

Most people are in super funds where the value of their superannuation savings is the combined value of all their super contributions plus accumulated interest. In technical terms, these are called 'accumulation' super funds.

Some people, however, are lucky enough to be in 'defined-benefit' super funds, where the value of their superannuation savings is determined by a preset formula involving their salary at retirement, their age, and how long they have been members of the super fund. Defined-benefit super funds, as a general rule, are very generous super funds as the value of each member’s retirement savings is usually very much more than could be saved in a normal accumulation super fund.

Good examples of this occurred in 2002 and 2003, when most accumulation funds were experiencing very poor, and even negative, returns because of poor returns from the sharemarket. During this time, many defined-benefit funds, particularly those run by some Federal and State Governments, were still able to credit their members' accounts with nominal interest, because the funds had special rules that prohibited members' returns going backwards.

Because this is paid for by the employer sponsors digging into their own pockets to top up the fund in these bad years, it meant that when returns bounced back a year or two later, members became very confused and Government sponsors very angry because these top-ups have to be paid out of the general Government budget. Governments would obviously rather spend this money on other things, such as schools, hospitals and roads.

However, because these defined-benefit funds can be so generous, they are often quite expensive for the employer sponsors to operate. As a result of this, most defined-benefit super funds are now either shut down or are closed to new members, meaning that even if you joined the employer today they would put you in their less generous accumulation fund, rather than put you in the older defined-benefit super fund.

In this way, people lucky enough to be in definedbenefit super funds are really the elite of super fund members. You should appreciate this, and thank their employer every day for the privilege, as it would in most cases be all but impossible for you to find accumulation funds that would pay you such a generous benefit upon your retirement. Finally, because defined-benefit super funds are very heavily subsidised by their employer sponsors, they usually have very low, or no, fees. Again, this just reinforces how generous these defined-benefit super funds really are.

<< Back to Learning Centre