When the accrual of superannuation benefits is for more years than the marriage/relationship period, often the question is asked about what was the pre-marriage portion in the current benefits. Some research in this area has thrown up some unexpected outcomes.
If we had a lump sum defined benefit design of (say) 20% of Final Salary times number of years of fund membership, the apportionment is easy. If there were 5 years of pre-marriage membership out of 15 years of total membership, the proportion is literally as simple as 5 divided by 15 – or a third of the end benefit. The problem is what would it be in an accumulation design?
Intuitively, with an accumulation design one would expect – through the operation of compound interest – the earlier years to have a higher weighting. If money tends to double with earnings every seven to ten years, the compounding of a dollar 15 years ago will be higher than a dollar from two years ago. However, it is not that simple.
We took a number of typical accumulation funds and examined the issue. Employer contributions were taken to be Superannuation Guarantee levels i.e. starting at 4% in 1992 and having risen to currently 9.5% of wages. Investment returns reduced by 1.5% for admin fees and investment taxes. Contribution taxes were 15% and salary increases in accordance with AWOTE. In other words, what one would expect to be the outcome for a typical Australian worker.
The results were:
The first 5 years of a 15-year membership contributed 32.7%.
The first 5 years of a 20-year membership contributed 19.4%
By adding member “after tax contributions” of 5% of wages, the proportion of the first 5 years of a 20-year membership increased to 22.2%.
So why are broadly proportional results happening also for accumulation plans? Firstly, the increased levels of SG are counterbalancing (to some extent) the compound effect. Additionally, the horror 2008 year results also have an effect. Whilst this is happening for the above examples, it would be dangerous to assume that it will apply in other circumstances. There is no substitution for an analysis on a case by case basis of circumstances.
The NetActuary Team