A wave of extra payments has hit Australia’s superannuation funds as retirement savers try to squeeze as much cash as they can into their accounts before the government changes regulations mid-year.
Contributions have been flat for about a year but funds and industry analysts report a sudden rise in the size of deposits to Australia’s $2.1 trillion superannuation pool, jumping by as much as a quarter over one month.
The extra cash will mean more dollars chasing blue chip shares, the traditional investment target for super funds.
Colonial First State says a surge in contributions in the final months of 2016 suggests investors are moving early to boost their superannuation ahead of reforms announced in the May federal budget.
From July 1, the annual non-concessional cap (the after-tax amount that can be contributed) drops to $100,000 from $180,000 for people with a total super balance of less than $1.6 million.
Voluntary contributions to FirstChoice Super rose 25% in November compared to October and were almost 20% higher than the previous November, says Colonial First State. Overall contributions across November and December rose more than 35% on the prior two months of September and October.
Colonial First State doesn’t release monthly contribution numbers in dollar terms. However, FirstChoice is Australia’s second largest fund with assets of $64.88 billion.
If the rise seen at FirstChoice is replicated across funds, then a 25% rise for funds with four or more members would mean an extra $2 billion contributed in November alone.
“These are the largest changes to Australia’s super system in almost a decade and this spike in voluntary contributions reflects not only more confidence in the system, but a sentiment to act early and take advantage of this window before the new rules take effect,” says Peter Chun at Colonial First State.
The impact on shares
The flow of funds into super has a considerable impact on the share market, with more dollars chasing the same amount of stocks.
At the moment superannuation is contributing about $40 billion a year into Australian equities as funds, looking for dividends and capital growth, buy into ASX-listed companies.
But the latest surge in contributions won’t last.
Hasan Tevfik, an expert in self managed super funds and equities strategy researcher at Credit Suisse, says the government’s changes mean that this source of capital, the funds in super, will become a little more scarce.
“We had a considerable slowdown in non-concessional contributions just before and after the May budget (when the changes took place),” he told Business Insider.
“So what we are seeing now is helping to offset the weakness back then.
“However, the longer-term issue is that the government’s superannuation changes, the biggest in 10 years, mean there will be a structural slowdown in superannuation inflows beginning from July 1.”
Industry analysts SuperRatings says the sudden rise in contributions appears similar to 2007 when there was a one-off window where individuals could contribute more to super before the introduction of the original contribution cap.
“We saw people taking advantage of this by maximising their voluntary contributions,” says CEO Adam Gee. Then, there were reports of some people borrowing to put in the maximum $1 million.
“We have certainly heard anecdotal evidence from funds suggesting that voluntary contributions have increased over recent months, most likely due to the passing of legislation limiting contributions post 1 July this year,” he says.
Official data on the extent of the extra payments in the December quarter won’t be released until mid February.
The latest statistics show contributions to funds with more than four members over the September quarter were $23.2 billion, down 4.7% from the same three months in 2015. Total contributions for the year ending September 2016 were $103 billion, down slightly from $104.6 billion the year before.