How the new superannuation changes can boost retirement savings
One of the biggest free kicks in superannuation is looking set to become a reality – and hardly anybody knows about it.
The reform is known as payday superannuation legislation which is currently being discussed and looks set to become law in time to apply to all employers from July 1, 2026, with consultations happening until the 2024-25 Budget to make sure that problems and difficulties are ironed out.
In simple terms, the change will see worker’s superannuation paid into their accounts at the same time as they are paid compared to the current situation in which employers only have to make payments quarterly.
So why is this such a big free kick for workers?
Time is money for super
Well, the old saying that time is money is absolutely true and payday superannuation works in two important ways to increase retirement nest eggs.
The first is that by payments being brought into line with pay periods, it will be much more obvious when an employer is failing to pay superannuation when it is due.
Quarterly payments are much more difficult to look out for, which is why Industry Super Australia has determined that unpaid super hits about one in four workers with the average effect spread across the workforce amounting to about $1700 a year per person.
The most recent year for which figures are available – 2020-21 – showed that 2.9 million workers were missing out on super they were owed which totalled $4.8 billion a year or $38 billion over eight years.
Lots of super remains unpaid
That’s a serious amount of super that remains unpaid, so once it is integrated with pay periods, that should dramatically reduce super underpayments.
The difference would be that when you see the super amount on your payslip, you could be fairly sure that the amount has been paid to your super fund through an integrated payroll.
At the moment, you need to actually check the fund itself to make sure that payments have been made quarterly, even if weekly, fortnightly or monthly payslips show that super has been allowed for.
Superannuation funds could also easily notify workers the moment a payment is missed, which should make for much better-informed super fund members.
Care for an extra $50,000 of super?
The second and potentially even more powerful way that payday super will improve member returns is that super will be invested earlier, adding the potential for returns to be much higher than they currently are.
Some of the large super funds have predicted that the final balance of some average Australians would be $50,000 higher due to the more regular and earlier payments and potentially much more again if super theft is avoided.
That is a serious chunk of change, although it should be pointed out that there is no financial miracle involved – businesses that are paying super will lose the use of the money earlier compared to the current situation in which they can treat unpaid super as an interest free loan for up to three months.
Will administration fees rise?
One potential downside to the change is that it could put some upward pressure on administration costs for super fund members because there will be a much greater number of transactions being processed.
Potentially, the number could rise from four deposits a year to 52 for weekly payrolls or 26 or 12 for fortnightly or monthly payments.
However, many super funds and employers are already looking at ways to streamline and integrate their payroll systems so that the added number of transactions can be handled as cheaply and automatically as possible.
Small businesses may also find the new system puts a strain on their existing payroll functions and will require more investment in payroll software that can cope with the change.
Better dollar cost averaging is possible
There could even be some dollar cost averaging benefits to the move, given that the best long term returns workers earn through super come when markets are low.
If you get 20 or 30 payments made when markets are really low compared to just one or two, you can potentially get a better result, although the main investment benefit will come by having more invested for longer.