Defined benefits in super: how do they compare to accumulation funds?

Defined benefits and accumulation funds are different types of superannuation Australians can have to support them financially in their retirement. So, what’s the difference between them, and how might it matter for you?

Research suggests that many Australians do not have enough money in their super to retire comfortably. The financial impacts of the COVID-19 pandemic have also led many Aussies to tap into their super early, widening the gap between their retirement savings and what they’ll need for a comfortable retirement, based on the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard.

Knowing what type of super fund you have, and considering options available to you, can help you financially prepare for your future.

What are defined benefit funds?

In a defined benefit (DB) super fund, a formula determines your retirement benefit, rather than an investment return. According to financial regulator ASIC’s Moneysmart website, most super funds of this type are corporate or public sector funds, with many now closed to new members.

In a defined benefit fund, the value of your retirement benefit is determined by the fund’s rules and will depend on your circumstances, including:

• how much money your employer contributes
• how much extra you contribute
• how long you have worked for your employer
• your salary when you retire.

Your length of service and the rate you contribute will influence the number that is multiplied by your final salary to work out your defined benefit.

In a defined benefit fund, your employer or the fund generally takes on the investment risk, as opposed to an accumulation fund where market fluctuations can influence your account balance. As QSuper describes, “if the market crashes, you still get the same ‘defined’ amount” from a defined benefit fund. This can be an advantage for this type of fund, as if you are eligible you’ll be guaranteed to receive a specific benefit when you retire.

Some examples of large corporate defined benefit super funds include Qantas Super and TelstraSuper, while government and public sector defined benefit funds include the Commonwealth Superannuation Scheme Fund (CSS) and UniSuper (which offers both a defined benefit option and an accumulation fund option for eligible members).

Defined benefit funds are less common than accumulation funds, which we discuss next.

Compare Super Funds

What are accumulation funds?

In an accumulation fund, the value of your super typically grows over time as you and your employer make contributions and depending on how your super fund invests those savings. How much money you have to supplement your income after retirement depends on the balance of your super account, which for an accumulation fund can vary significantly based on how your super fund’s chosen investments perform over time. This type of fund is much more common than a defined benefit fund.

In an accumulation fund, the value of your super depends on:

• how much money your employer contributes
• how much extra you contribute
• how much you receive in bonus contributions
• how much your fund earns from investing your super
• the amount of fees charged
• the investment option you choose.

If you’re thinking about changing funds, start by working out where you stand now and what you want out of your super fund. Different types of funds have different features and drawbacks.

Knowing the type of super fund you’re in will help you make informed decisions about your super savings. Additionally, Moneysmart recommends seeking professional advice before deciding to leave a defined benefit fund, as it says these funds are often “very generous” but may not let you rejoin later if you change your mind.

Compare Superannuation with Canstar

The table below displays some of the superannuation funds currently available on Canstar’s database for Australians aged 30 to 39 with a super balance of up to $55,000. The results shown are sorted by Star Rating (highest to lowest) and then alphabetically by provider name. Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s superannuation comparison selector to view a wider range of super funds. Canstar may earn a fee for referrals.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.

Super fund types and options

ASFA lists corporate funds, industry funds, public sector funds and retail funds as some types of super funds. In addition, there are MySuper funds and self-managed super funds (SMSFs). Accumulation super funds may fall into any of these categories, whereas defined benefit funds are usually either corporate or public sector funds.

Here are some of the key differences:

1. Corporate/employer super funds. Employer super funds can offer a wide range of investment options. They may be low- to mid-cost funds, particularly if the business is large, and often return profits to their members. They can also be retail funds.
2. Industry funds. Industry super funds were originally developed by trade unions and industry bodies. Industry super funds differ from retail funds in that they re-distribute profits from investments directly to members. Many have retained a non-profit, member-first ownership model and are now open to the public. There are differences between industry and retail super funds, which are two of the most common types of accumulation funds.
3. Public sector funds. Public sector super funds are generally for people working in the public sector, such as in government roles. Public sector funds commonly have limited investment options, lower fees and a member-first profit model, while some offer MySuper options. Many long-term members have defined benefits, while newer members are usually in an accumulation fund.
4. MySuper funds. MySuper is a scheme from the Australian Government where employees are offered cost-effective, low-fee super funds as their default option. Fees on MySuper funds are often restricted to only covering the cost of producing their service, which may include administration fees and investment fees.
5. Retail funds. Retail funds are usually run by financial institutions or investment companies. Generally, anyone can join a retail fund and they often have a large number of investment options. You can either apply to join a retail fund directly, or one may be recommended by your financial adviser. Costs can vary significantly between retail funds, so it could be worth carefully comparing your options.
6. Self-Managed Super Funds (SMSFs). A self-managed super fund is a superannuation fund that you can manage yourself, which is different to a regular super fund which is controlled by a fund manager. You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO). An SMSF can have between one and four members, and each member acts as a trustee.

The right type of super fund for you will depend on your personal circumstances, including your financial goals for your retirement, so it could be worth seeking professional financial advice if you’re thinking of switching funds.

Additional reporting by Christine Thelander.

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