Understanding the types of super funds

Key points

  • The main types of super funds are workplace, personal and retirement.
  • Workplace funds are those you join through your employer.
  • Personal funds are those you join as a private individual.
  • If a fund is 'public offer' it means it is open to the public. All personal funds are public offer but many workplace funds are now as well.
  • Retirement funds are those designed specially for people who are retired.
  • Self-managed super funds (SMSF) are small private personal funds that individuals can set up.

Now that you understand how MySuper and super choice works, the next question is: which one should you join? In making this choice, it helps to first understand the different types of super funds and their various market segments.

Recall how modern superannuation started as part of the industrial award system and how this meant employers paid most super contributions as part of the superannuation guarantee scheme. It should therefore come as no surprise that most super funds used to be highly involved with employers, rather than work directly with individual members. It should also not surprise you that this led to superannuation funds being very focused on employer administration needs, rather than on individual members.

However, following the introduction of super choice in 2005 and MySuper in 2013 the focus of superannuation funds shifted from being on employers to be much more on the members - people like you.

Using this background, we will now walk through the types of funds that are available, being:

  • Workplace funds -  super arranged by and through an employer, including MySuper products.
  • Personal funds - funds members choose on their own as private individuals.
  • Retirement funds - funds for members who have retired.

Workplace super funds

Workplace super funds are those that are available to employers, whether they are private sector companies, public sector agencies or government departments.

A major feature of these workplace funds, including an associated MySuper product, is that because they are able to take advantage of the business volume that comes from combining the superannuation buying power of a large number of employees, they are generally cheaper than personal funds. When looking at workplace super funds, there are two main ways for an employer to organise them:

  • Employers outsource the fund - Rather than run their own fund they use an industry or retail fund. Large employers using retail funds will usually use what are known as corporate master trusts while small employers may use regular personal retail funds known, in this case, as personal master trusts. These terms are described in more detail later in this chapter.
  • Employers can choose to operate their own funds - If a company runs its own super fund, it is said to run its own 'in-house' corporate fund. Examples of big companies doing this are Telstra and Qantas. Federal, State and some local governments also directly sponsor their own super funds, which are used by their own employees, or employees of the government businesses they own and operate.

Personal super funds

Personal super funds are those that are available to individual consumers. Because personal super funds are sold to individual consumers rather than to large-scale workplaces, they will usually charge higher fees than workplace funds.

And, because these funds are sold to individuals separately, they are usually accessed through financial advisers who often have to explain them to their consumer clients while also having to explain how superannuation itself works.

This means that personal super funds have higher sales and cost structures than workplace super funds. Since the financial adviser has to do this one client at a time without the benefits of economies of scale, it can make the process more complex than it is for workplace super funds.

MySuper products are workplace funds because they can only be offered to employees through their employer. Employers are only allowed to pay default superannuation guarantee (SG) contributions into MySuper products, or funds that offer a MySuper product.

Self-managed super funds

Self-managed super funds (SMSFs) are those where small groups of individual members (four or less) decide to operate their own fund. In technical terms, all the members of an SMSF must be trustees of the fund or they must pay a professional trustee company to provide this service.

Anybody can run an SMSF, but because they can often cost several thousand dollars each year to run, they are mostly suited to people with several hundred thousand dollars in superannuation.

Superannuation market segments

Now that you know the different types of funds we will now explain the various superannuation fund market segments.

In-house corporate super funds

Recall that in-house corporate super funds are operated by an employer sponsor on a 'stand alone' basis, meaning the company which employs the members is also the sponsor of the super fund. The fund is usually managed by a board of trustees who are jointly chosen by the employer sponsor and the employees themselves.

In-house corporate super funds operate on a not-for-profit basis, meaning that the trustee company operating the fund does not seek to make a profit from running the fund, and so can often charge members quite low fees. In many cases the sponsoring employer will pay some of the fund's fees directly, meaning that the fund members themselves often benefit from having to pay only marginal fees, if any, to be in the in-house corporate super fund.

Public sector super funds

Public sector super funds, sometimes also called government super funds, are very similar to in-house corporate super funds except that the employer sponsor is the local, State or Federal government, or a business enterprise they co-own or operate. These funds are usually managed by a board of trustees who are jointly chosen by the employer sponsor and nominated union(s) as the de facto representatives of the employees themselves.

Public sector funds operate on a not-for-profit basis, meaning the trustee management company operating the fund does not seek to make any profits and so can often charge members quite low fees. Most public sector fund sponsors pay most of the fees for their super funds, and so fund members themselves pay very low fees.

These very low fees are in addition to the very generous levels of superannuation contributions paid by most government employers - many government employees have higher contributions than the basic 9.5% superannuation guarantee level paid to private sector employees. This can make public sector super funds very attractive compared to other types of super funds. Adding complexity, some public sector funds have become public offer and now prefer to be known as industry funds.

Industry super funds

Industry super funds are funds operated by parties to industrial awards (usually employer associations and unions) to provide superannuation to people who work in a common industry or group of associated industries. Industry funds are usually managed by a board of trustees who are jointly chosen by the employer sponsors and the associated unions as the de facto representatives of the employees themselves.

These industry funds also operate on a not-for-profit basis, meaning that the trustee company operating the fund does not seek to make any profits, and so can often charge members quite low fees.

Retail super funds

Retail super funds are funds operated by commercial organisations such as banking, insurance, investment management and financial planning groups. This is why they are sometimes called 'for profit' funds. They may also be referred to as 'master trusts' because the fund operates under what is known as a master trust deed that bundles together the underlying collection of investment options, many of which may be regular managed funds.

Retail funds being known as master trusts is why, if they operate in the workplace sector or as a MySuper product, they may be called a corporate master trust. In contrast, a retail super fund that operates in the personal superannuation sector may be referred to as a personal master trust.

Defined benefit funds are those where your retirement benefit is based on a defined formula that takes into account such factors as your age, length of service and salary at retirement. In defined benefit funds the sponsor of the fund, e.g., the employer or government agency that runs the fund, wears the investment risk, i.e., even if the fund's investment returns are poor they are still required to pay your benefits.

Defined benefit funds are usually part of a broader defined benefit scheme - the fund is just the legal financial investment pool that stores the contributions and through which members receive their benefits.

Defined benefit superannuation is known for being very generous, paying much higher benefits than members could normally afford. This is why most defined benefit schemes are now closed - scheme sponsors can no longer afford them. If you are a member of defined benefit scheme, you should be very wary if someone tries to convince you to leave - ask yourself why they want you to leave.

 How your superannuation is taxedHow superannuation works 

Further Reading