Supercharged for Success: Understanding Australia’s Growing and Evolving Superannuation Landscape

Australia’s superannuation industry holds a significant position in the country’s financial investment landscape. The industry is a pivotal element in ensuring financial security for Australians during their retirement years. Superannuation (or super) mandates employers to allocate a portion of their employees’ income to their super accounts through the super guarantee (SG) rate, or pay the super guarantee charge (SGC).

The SG was implemented in 1992 with an initial rate of 3.0%, or 4.0% for employers whose annual payroll exceeded $1 million. Since the SG’s inception, the Australian Government has frequently reviewed and made modifications to the superannuation scheme. These changes include suggestions to augment the tax rate and an increase in the SG rate. Fast-forward to today, and the minimum SG rate is 11.0% of an employee’s ordinary earnings as of financial year (FY) 2024. 

Why is Australia’s superannuation industry significant?

Australia’s assets have been demonstrating consistent growth over the years, cementing its superannuation plan as one of the largest pension plans globally. In FY 2023, the industry boasted an asset pool of nearly $3.6 trillion, demonstrating its significant role in the national economy.

Australia, like several other members of the Organisation for Economic Co-operation and Development (OECD), has a proportion of pension assets to its gross domestic product (GDP) that exceeds 100%. This puts Australia among the countries with the highest ratio of pension assets to GDP in the world, underlining the scale and importance of Australia’s superannuation system.

In addition to the ratio of pension assets to GDP, another critical facet of Australia’s superannuation system is that its ratio of super assets to the domestic equity market capitalisation exceeds 100%. This means that the combined value of super assets surpasses the total value of all publicly traded stocks on the Australian Securities Exchange (ASX). Super funds, which have already ventured into investment in other assets, are increasingly exploring investment opportunities beyond domestic listed assets, including unlisted assets and foreign markets.

Supersizing super funds: The rising dominance of larger players

Not all super funds are created equal, and larger funds often have inherent advantages that come with their size and scale. These funds have the resources to expand their operations globally and partake in international transactions that may be out of reach for smaller funds. The larger super funds have been enjoying steady growth in their assets under management (AUM), which constitute an increasing proportion of total super assets.

Australian super changes aim for a more secure retirement for millions

Since FY 2022, the SG rate has progressively risen by 0.5% annually and is set to reach 12.0% by FY 2026. In addition, from July 2026 onwards, employers will need to pay their employees’ super contributions concurrently with their salary and wage payments – necessitating at least monthly super payments as opposed to the current quarterly contributions. As the power of compound interest kicks in, these changes are expected to benefit millions of workers in Australia.

The combination of super changes and financial advisory reform will help lessen reliance on the Age Pension, while also playing a critical role in securing a comfortable post-work life for future Australian retirees. With the rise in life expectancy, these reforms become even more crucial.

Who is impacted by these changes?

Superannuation fund administrators

Given the current superannuation scheme and the upcoming changes, the total amount of money invested into super funds is set to grow. The higher influx of funds will provide a larger capital foundation for super funds to invest, facilitating a broader range of investment opportunities over the coming years and inherently stimulating the expansion of the superannuation industry as more capital is being funnelled into the system. However, the larger the super industry becomes, the more susceptible it is to intense regulatory scrutiny.

Strategies for success

• Balance diversification with robust valuation governance: As super funds seek to broaden their investment portfolios beyond domestic equities by incorporating a greater portion of unlisted assets, they must also maintain a keen focus on their valuation governance. This will help satisfy compliance requirements and manage potential system-wide risk. Recent reviews by the Australian Prudential Regulation Authority have highlighted the need for robust governance practices in the valuation process of unlisted assets.
• Stay abreast of evolving regulations: With the expansion of the asset pool, it’s vital for funds to keep pace with regulatory changes and adjust strategies if needed. For instance, changes like the upcoming super performance test reform, the Green Bond program and the establishment of the Net Zero Economy Agency will shape super funds’ investment strategies, portfolio allocation and investment decisions. These changes will also likely prompt a transition towards investing in assets that back Australia’s decarbonisation and net zero economic transformation efforts, or projects that align with the Sustainable Development Goals (SDGs).
• Enhance the member experience: The anticipated growth in super balances is likely to spur increased interest from members who see the significant impact their super can have on their future lifestyle. Super funds should engage in government consultation sessions and collaborate with stakeholders to optimise the member experience. Engaging in discussions, like the one concerning the retirement phase of superannuation, is critical to guiding policies that align with members’ best interests. Proactive engagement in the shaping of policies can lead to more effective retirement income products and services tailored to members’ needs.

Businesses and HR service providers

The increased SG rate means that businesses and HR service providers will need to adjust payroll systems and processes. This might involve increases in administrative tasks, particularly for businesses that may not have automated systems in place. For some employers, the shift to paying super contributions on a pay-as-you-go (PAYG) basis rather than quarterly is likely to strain HR and payroll resources, as it will require more frequent tracking and payments. Even though the increase in the SG rate is small, it will still have a financial impact – especially for SMEs.

Strategies for success

• Anticipate and adapt to changes: Companies must monitor and comply with changes in superannuation regulation. This could involve regularly reviewing payroll records and systems to validate the accuracy and timeliness of superannuation contributions. Benefits administrators might also consider incorporating compliance benchmarks into regular audits, so that potential issues can be flagged before they become costly problems.
• Be proactive in financial planning: Although the increase in the SG rate is minimal, employers – especially SMEs – should reassess their budgeting strategies, potentially using tools like sensitivity analysis and financial benchmarking. Employers should weigh the financial implications of this incremental increase and set aside the additional funds required to meet the increasing contributions. Early planning and revision of budget allocations will help ensure the business is prepared to meet its legal obligations without causing undue financial stress.
• Embrace digital solutions: In the long term, the adoption of digital solutions can benefit employers in the form of lower administrative costs. Utilising automated payroll and superannuation systems can streamline the process, reduce the risk of errors and ensure compliance with new regulations. Investing in digital tools and software can also help manage the expected increase in administrative tasks, like more frequent tracking and payments, more efficiently and effectively.

Legal and compliance service providers

As the complexity and frequency of superannuation changes increase, businesses and individuals are set to seek expert advice from legal and compliance service providers to understand the implications and respond appropriately to remain compliant with the provisions. In addition, the Australian government has earmarked $40 million for the Australian Taxation Office (ATO) to better monitor super compliance. This increased scrutiny and potential for audits means that many businesses could benefit from enhanced compliance services to ensure they meet all of the legislative requirements.

Strategies for success

• Stay current with any modifications: Legal and compliance service providers must ensure they are up-to-date with the ongoing changes in the superannuation legislation, such as changes in the superannuation performance test and consultations like Superannuation in retirement, to remain proficient in the super industry. Legal firms can prepare for these changes by offering regular updates and information sessions, equipping their staff with the necessary skills to accurately guide and assist their clients.
• Reinforce superannuation compliance proficiency: Given the changes in the superannuation legislation and the expanding super industry, legal firms can upskill existing staff members or bring in new expertise to deliver a full suite of superannuation compliance services. This approach allows firms to become key advisors, guiding clients through the shifting superannuation environment and helping them grasp the implications based on their specific industries, workforce demographics and contributions. By offering such specialised services, a firm can differentiate itself and render significant value.
• Communicate effectively: Legal and compliance firms need to ensure clear and effective communication to keep clients updated on changes in the superannuation system. Using various communication channels and tailoring communication to client needs is crucial. For example, firms can build trust and strengthen relationships with clients by creating and sharing educational content and articles about the impending modifications in superannuation.