Defined Benefit Superannuation

Does anybody work in a sector that has a Defined Benefit for Superannuation? Or do people just stick to Accumulation accounts? My employer sends the majority to a Defined Benefit, and a little to Accumulation.

Comments

  • What's the question?

    Most people these days are on accumulation accounts.

    Defined benefits is relatively rare, but there are still quite a number of them going around by virtue of old arrangements.

    • Did the public service used to use it? When I was in Government in the past, I was on accumulation.

      • It has been used in the public service. I couldn't comment on specific roles or timeframes, but there are certainly some in the public service on these schemes.

        • DFES here in WA and we use defined for us Firefighters.
          Any additonal sacrafised super goes into accumliation and for our second jobs we have to annualy roll over from other super funds we have.
          But it has served me well superwise. That is until the wife realises that she wants to take her ball and go home… along with half of it haha

  • My employer sends the majority to a Defined Benefit, and a little to Accumulation.

    Are you saying you have one of each account that your employer sends your contributions to each period? Defined benefit accounts are often setup in a "hybrid" fashion so that there's an "accumulation" portion attached to that account. The "defined benefit" rules set out how much you have to contribute each period and anything additional to that goes to the accumulation portion. Any "additional" amounts are usually voluntary.

    The Defined Benefit accounts are known to be much more "generous" in the end if you compare it to an accumulation account. The final benefit is based on a formula taking into account your salary and total service vs an accumulation account that simply works like a bank account where contributions and investment earnings just add up. It is always equal-to or higher than that of the equivalent accumulation account, plus that DB portion is not subject to market fluctuations.

    • Yes, there is a mandatory amount that goes to the Defined Benefit (inclusive of salary sacrifice), and there is a smaller amount that rolls into accumulation.

      • I don't know what the benefit design is like in your particular defined benefit, but if you intend on sticking with the industry/employer for a number of years, I'd stay with the DB account.

        • I have two years to decide, so I am going to use this period to inform me if I intend to have a long-term career in this sector (or not).

          I still have a large accumulation account anyway (from my past career).

          • @Joshaz: The reason I say "if you intend on sticking…. for a number of years" is because when they calculate your DB benefit, there's generally two calculations. One is the actual defined benefit based on the design formulae and the other is what they call the "SG Minimum". The "SG Minimum" is basically what you would've got had your contributions just gone into an accumulation account (with interest). Your final benefit is the "higher of" those calculations.

            DB benefits were initially introduced as an incentive for staff to stay with a particular employer. For the first few years of service, the difference between a DB and accumulation is quite minimal. But as your service period gets longer, you start seeing a bigger and bigger difference in the final amount between the two types of benefits. The reason the DB schemes have become scarce now is because they cost the employer a lot more money than the accumulation style accounts. Most of that "extra cost" to the employer is what funds the higher benefits.

  • Yes

  • Is it a funded or unfunded defined benefit fund, or a hybrid super fund?

    Most of the "original" funded defined benefit schemes finished about 20 years ago when employers realised it was costing them too much. Plenty of people still on defined benefit but they will all be facing retirement in the next decade or so.

  • only one job left with defined benefit that hasn't been grandfathered and closed to new applicants

    prime minster!

  • +4 votes

    Huge benefit from DB schemes when it comes to concessional contributions.

  • Real defined benefit or fake defined benefit like Unisuper ? (Unisuper is not actually defined - the formula can and has been adjusted to decrease what it pays out. The fund is not backed by the employers or the Government - if it runs out of cash they are on their own, hence why they can choose to decrease the benefits to try and stop that happening)

    • Is that so?

    • What is their "fake" defined benefit? How does it work? I was considering moving across to a job there recently!

      • Yes, I am also keen to hear more.

      • There are lots of articles if you google it

        A rash last year when they had problems
        e.g.
        https://www.theaustralian.com.au/business/wealth/unisuper-fa...
        https://www.smh.com.au/business/banking-and-finance/how-the-...

        And a rash around 2011 - 2014 when they had troubles and decreased the formula
        https://www.theaustralian.com.au/business/wealth/defined-ben...
        https://www.abc.net.au/news/2011-12-13/unisuper-members-at-r...

        Note in your first two years of employment you can opt out of their "defined" benefit and into 100% accumulation; and a recent law change means that the next round of enterprise agreements will not be able to force employees to choose Unisuper at all; so if you can manage to get a job in higher education in this climate you can avoid it.

        • I've had a read of the two articles (couldn't read the "The Australian" articles because they're behind a pay wall) and I think the word "fake" may be too harsh of a word.

          While I'm just going by what the articles say, it seems that the funds have been setup in good faith, but now seem to be having solvency issues. Every few years, actuarial valuations are meant to be conducted to ensure there are sufficient funds to pay out the benefits. If there appears that there is likely to be a shortfall in funding, then the employers are asked to contribute more. However, since the employers have refused to contribute additional money, they are trying to work out what their options are. The government regulatory bodies would've also get involved, so it wouldn't be a simple slashing of benefits whenever they want to.

          • @bobbified: They're calling it defined and it's not defined. That's incredibly misleading. If they were calling it Pooled Benefit or something, it would signal that it is something different that people should read up on. Using the word Defined people assume it is like older defined schemes where there is no risk because it is backed by the government or employer, when it is not at all.

            If they were a lot more upfront with members about how it is structured and the risks they are taking by joining then people are free to make those choices, but up until recently people were forced in by enterprise agreement and if they don't opt out in the first two years they cannot change. It is very predatory towards young employees who might not read the fine print until later in their career and realise they are stuck in a choice they did not realise they were marking.

            • @toniyellow:

              They're calling it defined and it's not defined. That's incredibly misleading. It they were calling it Pooled Benefit or something…

              It is a defined benefit. The word "defined" describes the way the benefit is calculated. All defined benefits are funded by a pool that is known as the "Fund Reserve". What's the difference with this one?

              Using the word Defined people assume it is like older defined schemes where there is no risk because it is backed by the government or employer, when it is not at all.

              This particular fund is meant to be backed by the employers, but in this case, some of the employers are now simply refusing to contribute more. Other defined benefit funds are no less susceptible to this, especially if the employer happens to go out of business or something.

              but up until recently people were forced in by enterprise agreement and if they don't opt out in the first two years they cannot change. It is very predatory towards young employees who might not read the fine print until later in their career and realise they are stuck in a choice they did not realise they were marking.

              As I mentioned earlier, there's a minimum benefit of what the member would've received if they instead had an accumulation account. So those "stuck" in there won't necessarily lose out money-wise. If there's any difference, it'll be their final benefit being higher than had they chosen an accumulation benefit. And when they leave employment, they likely have the choice to convert it into lump sum and have that amount rolled into another accumulation account somewhere else. There's a reason a lot of employers have been encouraging their defined benefit members to convert to accumulation - it minimises the future costs to the business. Some are even offering financial incentives at the present time. For most people, getting out of a DB account is easy - it's getting in that's hard.

              I'm going to openly declare that I work in the industry, have been for almost 20 years and am currently at a mid-senior management level. But I have no interest in arguing either for or against the industry. All I will say is it pays my bills and I'm simply stating what I believe are facts, without being biased in any way.

              • @bobbified: In the articles you didn't read, even Unisuper acknowledge "target benefit" is a more appropriate description for how the fund operates. If the trustees can decrease the benefit whenever they need to prop it up a little longer, it is not defined.  The fact they acknowledge this and yet continue to market as defined to new members is incredible. Misleading marketing does seem to be pretty common amongst the superannuation industry. 

                They also do not have any such SG minimum rule at UniSuper. If someone leaves DBD the transfer amount is based on the value of their defined benefit component using the formula as of the transfer date, and it is perfectly possible for this to be less than what the member contributed, particularly if they have only been in DBD for a few years.

                • @toniyellow:

                  If the trustees can decrease the benefit whenever they need to prop it up a little longer, it is not defined.

                  Despite what it might seem like, the Trustees cannot just simply go and decrease members' benefits. There would be a lot happening behind the scenes that you're not aware of.

                  They also do not have any such SG minimum rule at UniSuper.

                  The rule around the SG Minimum is not optional. The only time they don't need to calculate an SG minimum for comparison is if the fund actuary has already determined that the benefit payable to the member is always already over and above the normal SG requirements. This actually wouldn't surprise me with UniSuper because, while I don't know exactly what their benefit design is, I have previously heard that they operate quite a generous scheme for their members.

    • Me too to coin a phrase

      I will ring Unisuper and ask them for a comment on their "fake" scheme and what a member should do

      Rather alarmed.

    • Are there any high profile cases of a defined benefits scheme going broke?

  • +1 vote

    My employer sends the majority to a Defined Benefit, and a little to Accumulation.

    You're lucky then…

    • Why is that?

      • +4 votes

        Defined Benefit plans load more risk with the employer and less with the employee…

        That's why they got rid of them… Removes liabilities from the company accounts…

  • Speak to your Super fund.

    I work in Finance and I'm pretty cluey about Super but DB and hybrid DB models can be confusing. My mum is a teacher who is on a hybrid DB fund from 1991 and it was so hard to get my head around how it worked.

    Hybrid = a DB and DC component.

  • I have a defined benefit account (since 1988) and I salary sacrifice 1% of my salary. As I have 177 points already I can make do with 1% as 180 points is the max payout (5.4X my final salary [this is the risk-free bit that jv is talking about] plus money I have paid in to it [an accumulation part, I suppose] a percentage between 1% and 9% which I vary from year to year). My employer also pays in to an SG account for me.

    I also have a separate super account which is an accumulation account. I salary sacrifice in to this account AND/OR pay in after-tax dollars and then claim on my tax.
    (I started this a few years ago because I can't make 'extra' payments beyond the 9% in to the define benefit scheme).

    What was your question?

  • I accumulated substantial super with a Public Service defined benefit scheme.
    There are pluses and minuses and you do need to understand exactly what you are doing.
    Enormous advantages in terms of concessional inputs, but some schemes are heavily weighted towards remaining with the scheme/employer. In the Public Service the idea was to have career public servants that stayed for life, average wages but a good retirement, a different attitude now prevails….
    As time goes by, mine became ‘Golden Handcuffs’. Very good financially if I stayed a public servant, but I had to let other opportunities go by.
    Unless it is govt, I guess you need to be confident that your employer will be solvent when to come to get your money as a defined benefit scheme is essentially a promise for the employer to cough up their money to add to yours when you withdraw. 🤔

    • I very much agree about the Golden Handcuffs and the poor wage/good retirement.

      Dad was in the Commonwealth provident scheme. He earned far more in 30 years of retirement than he did in 21 years of working for the CPS.

  • You need to read the T&Cs of the defined benefit fund to see if it's worthwhile.

    My first job at Goodyear it was DB. If you stayed 30+ years it was great. I left after 5 years and got a cheque for <$150.

    At Qantas there were 2 wholly DB funds (super 1 & 2) and a partial DB fund (super 3). Super 1&2 were great if you intended to stay longer than 20 years and wait until retirement.

    Super 3 was very good to me when i worked out that if I put extra money in that QF had to add extra too and they had to pay it even if I left.

    QF used to launch a new super fund every 2 years. They were up to Super 7 when I left and it was not very good.