Workplace super schemes offer members money for nothing

By Mark Fryer

If only all investment decisions were so simple; if your employer offers a subsidised superannuation scheme, grab it unless you have an extremely good reason not to.

Such schemes - in which your employer adds something to your savings every time you make a contribution - are one of the most attractive investment options around.

So much so that The Office of the Retirement Commissioner, which normally advises people to pay off debt before investing, makes an exception for workplace super schemes.

So does Consumer magazine: "If you can get into a good employer-subsidised scheme you should do so before paying off the mortgage" it advises in its book on retirement planning, Your Future Nest Egg.

That's not because such schemes have discovered some magical formula for earning extra-high returns.

Their attraction comes simply from the fact that the employer's contribution effectively boosts the amount you are putting aside.

If the employer matches your contribution, the net effect is that every dollar you put in immediately grows by 67c (it's 67c because the dollar the employer contributes has 33c tax deducted from it).

That's like earning a 67 per cent return on your savings even before the superannuation fund starts earning anything on its investments.

Even if the employer's contribution is less than dollar-for-dollar, it's still effectively money for nothing - although it may be some time before you can get your hands on it.

Such schemes do have their disadvantages, the chief one being the fact that any earnings the fund makes on your behalf are taxed at 33 per cent, even though you may be on the lower tax rate.

While that's unfair to lower income earners - and efforts to come up with more equitable system have so far failed - the employer subsidy will generally more than make up for it.

As well as the chance to have your employer subsidise your savings, workplace schemes can also be a relatively low-cost way to invest, and there's the advantage that the money can be deducted from your pay-packet before you see it, which means less strain on your willpower.

Despite their merits, it's still worth checking the terms before deciding to put part of your pay into a workplace super scheme.

Pay particular attention to what the experts call the "vesting" scale, which spells out how much of the company's contributions you get to keep, depending how long you stay with the firm.

If you are only in the scheme for a short time, when you leave you may not get any of those contributions, so workplace superannuation may be less attractive if you're sure you'll soon be moving to a new job.

Check also to see whether the scheme provides any life insurance or other benefits.

The only problem with workplace super is that it is getting harder to find, as employers wind up schemes or close them to new members in order to save money or avoid the administration costs.

According to the Association of Superannuation Funds, which represents such schemes, as of February this year registered employer schemes (excluding the Government super fund) had some 283,000 members and assets totalling $10.4 billion. While it sounds a lot, the number of members is lower than it was at the beginning of the decade.

Where such schemes do exist, there seems to be no reluctance to use them; The Office of the Retirement Commissioner surveyed 12 large employer-sponsored schemes between 1994 and 1998 and found that the percentage of eligible employees who took advantage of them climbed from 80 per cent to nearly 88 per cent.