Super funds come in two basic forms.
Defined benefit funds
With defined benefit funds your final pay-out is “defined” by a set formula. For example, you may get four times your salary if you retire at 55, five times at age 60 and so on. You know in advance what you will get.
These were once quite common in public sector super funds and with some larger companies. The advantage of defined benefit superannuation is certainty about the size of your payment upon retirement or leaving the company. The bad news is that it may be less attractive if you don’t stay with the one company until retirement. I know many people who feel trapped by this type of super. The end benefit is so attractive, they just can’t afford to leave. Low motivation is bad for the employee and employer and what a sad situation it is, because no one wins. These people wait for 5 o’clock so they can go home, and long to retire.
With defined benefit funds, how the investments in the fund perform is of no interest to you. Your end benefit is paid anyway (unless your company goes broke and defrauds the super funds). Your employer will be very interested in investment performance though because the better the fund does, the less he has to put in! You may have seen very public arguments about “surpluses” of defined benefit funds. A surplus means simply that your super fund has more money in it than it needs to pay out to its members in entitlements. Often employers will try to reclaim this surplus, and employees fight to hang onto it.
Providing the surplus is accurately measured, I have no doubt who it should belong to – the employer. They guarantee the member will receive a set benefit and dips into the company coffers if the money is not there. So, given the employer must meet any shortfall, I have no doubt any surplus, if it occurs, also belongs to them.
Accumulation funds are becoming increasingly common and are also very simple. Whatever you or your employer puts in, plus investment earnings, less expenses, is yours.
While with defined benefit funds you concentrate your attention on the documentation describing your end benefit and don’t worry about investment, with accumulation funds you do worry about investment and you need to ask lots of questions. With accumulation funds what you get is determined by what goes in, but the expenses of the fund and, in particular, the performance of the investments it holds, are critical to what you end up getting.
Thing you should know about your accumulation fund
- How much is your employer putting in?
- How much do you have today?
- Where is the money invested ?
- What are the fees and charges?
- Do you get any insurance cover, if so how much?
- Can you add your own money to your employer’s super fund?
- Do you have any choice about how the money is invested?
If you don’t know the answer to these issues – ask! No reputable employer would not want to answer these questions.