Recent data showing a significant increase in funds flowing into Australia’s superannuation system is a result of governments topping up old defined benefit (DB) schemes, according to Tria Investment Partners managing partner Andrew Baker.
The Australian Prudential Regulation Authority’s (APRA) recently released 2011/2012 superannuation data found total contributions increased to between $117.5 billion and $82.1 billion from employers, and $34.2 billion from members.
Mr Baker said this was commonly misreported as a turnaround in investor sentiment, or attributed to members trying to beat the cut in the contributions caps.
Employer and member contributions to self-managed super funds (SMSFs) were up on the previous year but still below or in line with recent historical levels. And the new edition of the Tria Super Funds Review found member contributions to collective funds were down slightly on the previous year.
Employer contributions to collective funds were up around $10 billion, of which Mr Baker said around $4 billion were “normal growth” in line with recent years and $1 billion were additional salary sacrifice contributions.
But around half, or $5 billion, were the result of governments “filling in some of the funding holes in their old defined benefit schemes”, according to Mr Baker. This included $4.6 billion by the NSW government into State Super, and $0.5 billion by Victorian local councils into the Local Authorities Super Fund.
Mr Baker told InvestorDaily that the underfunded schemes are typically old closed schemes that date back decades, and will likely be running for decades to come.
“This is common with DB schemes around the world; the benefits promised have been overly generous and governments have not kept up with funding requirements,” he said.
Every few years an actuarial calculation is done that works out the efficiency of the schemes and that triggers some kind of top up which is ultimately paid by taxpayer, he said.
“The cost of filling holes in DB schemes is becoming a big deal, given that the above initiatives come on top of the support that the Commonwealth provides to the [Commonwealth Superannuation Scheme, Public Sector Superannuation Scheme] and military schemes to keep them solvent (ignoring the role of the Future Fund, which is not supposed to be tapped until 2020),” Mr Baker wrote in an update on the Tria website.
These funds “overwhelmingly” experience outflows, and the cost of topping them up is now running at over $4 billion per annum in terms of transfers from the federal budget, he added.
