Comparing Funds

It is extremely difficult to compare one fund to another.

Is a final salary Defined Benefit Fund better than a money purchase Defined Contribution Fund?

At first glance since the investment risk is in a final salary Defined Benefit Fund is held by the Employer and not the Fund Member it might be assumed that a final salary Defined Benefit Fund is the better alternative.

However Members of final salary Defined Benefit Funds face what is called “Accrual Risk“, that is they never obtain there expected benefit because their Employer terminates their Employment well before the Normal Retirement Age of 65.

Around half of a final salary Defined Benefit is accrued in the last 10 years of service, so there is a very big incentive for HR Managers to terminate Employees well before the Normal Retirement Age of 65. “Human Resources Manager is a classic example of “Newspeak“. Human Resource Managers are not rewarded for acquiring “Human Resources“, they a rewarded for getting rid of “Human Resources” – that is Employees who attain the Early Retirement Age of 55.

The Age Discrimination Act 2004 is routinely ignored by HR Managers seeking their next bonus cheque.

A useful benchmark to compare superannuation benefits is the “classic” pension scheme.

A “classic” pension scheme would provide a “final salary” pension based on 1/60th of every year of service with a maximum pension benefit of 2/3rds final salary.

Thus if an Employee joined a company at age 20 and was employed for 40 years, he or she could retire at age 60 with a pension equal to 2/3rds of their final salary.

If the Employee resigned or was retrenched before the Age of 60 (or 65) , then the Member would remain a member of the Fund and receive a “Deferred Benefit” once they attained the “Normal Retirement Age” of the Fund

The Employee who resigned or was retrenched might obtain employment with another Employer and then also receive a pension from the pension fund of this Employer as well.

Scenario A

Bill Black joins an Employer (Employer A) at age 20 and after 40 years service retires at age 60 with a final salary of $145,000 per annum.

The pension is calculated at 1/60 final salary for each year of service, therefore Bill Black receives a pension of $97,000 per annum.

{This would be equivalent to a Lump Sum Benefit of $1,300,000 if used to purchase a 20 year annuity with an investment rate of return of 4.5% plus a capital return over 20 years}}

Scenario B

Wendy White also joins Employer A and works with Employer A for 20 years and then is retrenched. Wendy then joins Employer B and works for Employer B for another 20 years and then retires at age 60.

After 20 years with Employer A Wendy leaves with a final salary of $60,000 and a “Deferred Pension” of $20,000 per annum {ie 1/3 of $60,000} (indexed to the CPI inflation rate – say 3 %per annum). At Age 60 this will equal $36,000 per annum.

Wendy joins Employer B as after another 20 years service leaves with a final salary of $145,000 and a pension entitlement of $48,000 per annum {Salary is assumed to grow with average weekly earning}.

Together with the “Deferred Pension” from the previous Employer A, Wendy has a total Pension Benefit of $84,000 per annum, which is less than Bill Black’s pension of $97,000 because wage rates generally increase at around 1.5% higher than the general inflation rate.

The important aspect of Wendy’s scenario is that she remained a Member of Employer A’s Superannuation Fund (Pension Fund) for 20 years after Wendy had been retrenched.

The Superannuation Fund is a separate legal entity to the Employer-Sponsor.

Comparing your Benefits

How do you retirement benefits compare with either Bill’s or Wendy’s?

Will you be able to retire at age 60 with a pension of 66% of your final salary or a lump sum equivalent of around 9 times your final salary?

Most members of Government Regulated Superannuation Funds will only achieve a fraction of what Bill or Wendy were able to achieve.

The Australian Superannuation System will not deliver what the Government wants you to believe it will deliver, even though a minimum of 9% (increasing to 12%) of your earnings is compulsory directed into a system were the returns are poor and the risk is high.

To find out more, become a Member of Australian Guardians today.

Australian Guardians – Protecting your wealth when no one else will®


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