Why No Superannuation Can Cost You Money
Sydney Morning Herald
Tuesday September 2, 1986
SMALL businesses operating without a superannuation scheme might be missing out on attractive tax concessions as well as being unprepared for any new compulsory superannuation laws.
According to the chairman of Eastcorp Investment Management, John Mennega, companies with existing schemes should be assessing their options and looking at both investment choices and preparing for possible changes to superannuation laws.
Many large corporations already have superannuation schemes set up for executives and salaried staff and are able to assess the options available to them efficiently.
He says it was unfortunate many small businessmen and women were not generally aware of the benefits of superannuation for both themselves and their employees, or the many differences between superannuation products.
"Small business owners could save a lot of money for both themselves and their staff by investing superannuation funds correctly, and designing their funds appropriately," Mr Mennega says.
He believes many small businesses do not have well-planned investment portfolios, leading to reduced member benefits and an increased cost to employers.
"For example, properly structured non-contributory funds more effectively optimise employee benefits, hence reducing company costs.
"If the employer pays a staff member $25,000, an employee paying 26 per cent tax will effectively get only $18,500 in his hand after tax.
"A 5 per cent contribution of $925 would be equivalent to the employer contributing $1,250 because contributions by an employer are tax free.
"Tax on eventual withdrawal will also be different as it is possible to time it so that the non-contributory benefits are significant.
"By sharing some of this tax benefit with his employee, a business owner may also be able to reduce some of his costs.
"In some cases, where an employee is due a salary increase, it may be more attractive to both if some or all of the benefit went towards the superannuation fund.
He says the three main investment strategies adopted by small businesses are managed capital-guaranteed funds, managed market-linked funds, or internally managed funds.
"I would strongly recommend a professional approach to the investment strategy. A difference of only 4 per cent in performance over 10 years on$10,000 is a lost benefit of $5,000."
Capital guaranteed funds are usually invested in fixed-interest securities and ensure that $5,000 invested means investors get $5,000 back, plus interest.
Market-linked funds are often invested in more volatile investment areas such as the stockmarket, where there is clearly more risk.
Mr Mennega says while it cannot be assured that $5,000 invested will be returned, there were very few of the top performing funds which would not return the investment with significant growth given sufficient time.
Top capital guaranteed funds are returning 15-17 per cent a year, and top market-linked funds average around 20 per cent.
An important consideration is the poor performance of many internally managed funds.
"What many fund trustees do not realise is that a poorly invested fund could be forgoing both additional returns as well as lower risk.
"It is up to the small business owner and his investment adviser to decide what best suits the fund's particular needs.
"The small business may, in fact, decide to have two funds to cover different needs for different employees."
Mr Mennega says there is nothing restricting owners of small businesses from managing their own funds except results, but he says track records were not impressive. Many had not properly changed their investment strategy with changes in legislation.
"Eastcorp's experience and that of various actuaries indicates in many cases that the returns for many internally-managed funds are mediocre at best.
"The reasons for this is that the trustees and managers of these funds often do not have the investment expertise required to manage the funds.
"A prime example of this mismanagement is that there are a number of funds still set up under the old 30/20 rule which was abolished about two years ago
"This 30/20 rule dictated that 30 per cent of the value of the fund had to be invested in government and semi-government securities, reducing the flexibility of the investment portfolios and affecting the performance.
"Alternative investment strategies are available, and can be implemented in such a way as to increase performance while not increasing risks."
Once employers realised the need for superannuation and decided to invest in a market-linked or capital-guaranteed fund it was necessary to compare the performance and security of the many managed funds on the market.
"Many people make the mistake of looking only at the historical performance of the funds and use this as their only means of assessment," Mr Mennega says
"Such figures are often quite misleading. This is where you need a trained investment specialist who can assess the present position of the fund, taking into consideration where the fund is invested, its volatility, who the managers are and, most importantly, its appropriateness to the needs of your fund."
Once the right investments are selected, watching them carefully is crucial.
Should circumstances change significantly this should reflect in the strategy
But the risk in consulting the fund managers directly is that they are, of course, biased towards their own funds.
There are also many investment advisers linked to these fund managers, effectively removing their objectivity.
"It is also necessary that your investment advisor keep up-to-date with all the latest products," Mr Mennega says.
"This is a time-consuming exercise and is the reason many accountants, solicitors and superannuation fund administrators link up with investment advisers qualified and experienced in this specialised area.
"Though there are a number of specialist design considerations in choosing the correct superannuation scheme, there are many benefits to be had if the exercise is undertaken properly."
Combined with this is the desire of the government to reduce its growing deficit.
One of the methods of achieving this is to reduce the huge welfare payments to the aged by encouraging people to provide for their retirement with some form of superannuation.
As a result, the business community, including small businesses, are being offered major tax concessions for both themselves and their employees.
© 1986 Sydney Morning Herald