Essays on The Australian Pension System Case Study

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The paper "The Australian Pension System " is an outstanding example of a finance and accounting case study.   The pension or superannuation system refers to agreements made by people in order to have some funds available to them in their retirement age. The Australian government support and encourage pension and superannuation arrangements where there are minimum compulsory provisions for employees. With an increasingly ageing population, the main aim of every government is to overcome the untenable burden of funding without raising taxes explicitly. This article involves an analysis of the Australian pension system and the comparison of the Chinese impact system and its impacts on company practices. The Australian pension system as compared to other countries has relatively small public in regard to the Age Pension and large private component in defined contribution schemes.

The design of this superannuation system is usually inconsistent with economic rationalism which has been Australian public policy underlying assumption for the past few decades. It is worth noting that economic rationalism was the foundation for numerous recommendations of the Wallis report in 1997 (Harper, 2008). The Wallis report (1997) led to the shaping of the current Australian finance system with the superannuation system included. According to Greenspan (2007, p.

367), this system assumes that rational individuals will by making their own choices, optimize their own welfare. In turn, the self-interest invisible hand will guide the market economy towards a stable equilibrium of low unemployment as well as high growth. Economic rationalism logically results to an efficient market theory where market discipline as a result of competition leads to cheaper pension products with better characteristics of risk-return where people can make a choice of what will suit their own circumstances.

Where there are comparable products, it means that people will switch from high cost to low-cost products. This, in turn, will exert downward pressure on the overall cost of the Australian pension system. Choice legislation was enacted by the government in 2005 in order to facilitate the choice of the investor and also to enhance market competition. After the enactment of the legislation on choice, the members of the pension fund seemed to be less active in regard to the making choices contrary to what was expected.

The switching rates between funds began to decline from around 6% in 2005 to 2% by the end of 2009 (Morgan, 2010). According to Fear and Peace (2008), the members of the super fund appeared to show inertia and apathy. For instance, multiple accounts continued to increase especially the lost accounts which show a lack of interest in regard to super funds as the people move between jobs. For the superannuation system, the overall fees as the percentage of the total asset in 2002 averaged 1.37%, 1.3% in 2004, 1.26% in 2006, and in 2008, it was 1.21%.

However, the fee increased for some retail master trusts from 1.67 in 2006 to 1.69 in 2008 (Warner, 2008). Sy (2009) found out that the financial services industry has been ignoring the fees for both academic and fractioned research. As a result, Warner (2008) realised that over a 12-year period, about $105 billion was paid to the industry’ s service providers. This means that due to the fees paid to this industry, the total investment earning after taxation reduced by 40%.

In addition, the total fees paid increased (from $ 8.9 billion in 2005 to $ 13.4 billion in 2009) due to rapid increase in total assets as a result of large superannuation contributions, but the decline in expense ratios was slow.

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