Employees’ Choice of Superannuation Plan

effects of risk transfer costs

By Kerry Brown, Gerry Gallery, Natalie Gallery and Ross Guest

Australian employers, and employers around the world, are moving away from defined benefit superannuation plans for employees to accumulated benefit plans.

Most defined benefit plans have been closed to new employees.

In defined benefit plans, employers promise a certain level of benefits on retirement. It is usually determined by a multiple of the members final year salary and years of service. If the fund is in deficit because the returns on assets in the super fund are lower than expected the employer has an obligation to meet the level of benefits promised. In accumulation plans, employers are simply obliged to pay an agree percentage of an employees' current salary upon retirement. One contributions are paid the employer contribution is discharged. Each member's benefit is an accumulation of the contributions plus the investment earnings. So the risk is transferred to the employee if the fund performs poorly.

This study looks at the impact and choices of members of the Superannuation Scheme for Australian Universities. (SSAU) when the SSAU made an offer to members to transfer from a defined benefit scheme to an accumulated benefit scheme. It seeks to explain why most members chose to stay in the defined benefit scheme. The members seemed willing to trade off the possibility of higher returns for the greater security of benefits.

(Journal of Industrial Relations. vol. 46, no. 1, March 2004)