Glossary

ABSOLUTE RETURN FUND

A type of hedge fund. Absolute return funds aim to meet objective performance targets rather than benchmark norms.

ACCRUED BENEFITS

Benefits already accumulated, as distinct from those to be built up in the future. In other words, how much you have saved already.

ACCUMULATION FUND

A superannuation fund where your accrued benefit is the total accumulated value of your contributions and interest, less fees and costs. It is sometimes referred to as a defined contribution fund.

ACTIVE MANAGEMENT

An investment management style which seeks to achieve returns above a benchmark through asset allocation and stock selection, i.e. through the skill of the investment manager. For example, if the Australian share market, as measured by the All Ordinaries Index, earns 10 per cent an active Australian share manager will try to earn more than 10 per cent.

ADVISER

A person who advises individuals on suitable forms of investment for their needs. Advisers are sometimes called financial planners.

ADVISER GROUP

A licensee, authorized by ASIC to provide financial services, with a number of authorized representatives under their license.

AGE PENSION: a social security benefit paid by the Federal Government to people who have reached the qualification age, being age 65 for men and between ages 63 and 65 for women, depending on when they were born. The amount of pension paid (if any) is determined by the income test and the asset test.

ALLOCATED PENSION

A pension or annuity arrangement where a person chooses to withdraw from their account on a regular basis (e.g. monthly), an amount within prescribed legal limits, until death or there is nothing in the account. On death, the balance may be paid as a lump sum to a designated beneficiary, used to buy a further pension for a surviving spouse or may continue as a reversionary pension. The main differences between an allocated and a traditional pension are that the former offers access to the invested capital with some flexibility in the regular payment amount but it offers no protection against the money running out during the person’s lifetime.

The value of your account moves up and down according to the investment earnings you receive and the amount of income you withdraw. If you are 60 or over, you pay no tax on the income payments you withdraw. You are required to withdraw a minimum percentage as income each year, based on your age. Your capital can be withdrawn at any time as a lump sum (provided eligibility criteria are met). There is no guarantee that your account balance will last your lifetime.

ALLOCATION PRICE

The price at which a unit in a unit trust is purchased.

ANNUITY

A series or stream of regular payments (e.g. a monthly pension), purchased with a life insurance or superannuation fund lump sum to provide a retirement income. Where a superannuation fund makes the payments the word ‘pension’ may be used. Payment amounts depend on the lump sum, expected future investment return, frequency of payments, expenses and the life expectancy of the individual purchaser or the term, if it is a fixed-term annuity. Generally, the annuitant chooses a payment value of any amount between prescribed upper and lower limits.

APPROVED TRUSTEE

A trustee company approved by the Australian Prudential Regulation Authority (which must be satisfied that the company can be relied on to perform the duties of a trustee in a proper manner) and fulfils other minimum liquidity/financial requirements. Only approved trustees can promote a public offer superannuation fund.

ASSESSABLE INCOME

Income earned before allowable deductions.

ASSET

Anything of value in the form of cash (including amounts owed), fixed assets such as property or equipment, or intangibles such as a company’s goodwill or brand. A superannuation fund’s assets might include shares, property, cash or fixed interest investments. For accounting purposes, assets are resources held to produce future economic benefits, for example providing future cost savings or generating future revenue or capital gain.

ASSESSABLE INCOME: income earned before allowable deductions.

ASSET TEST

The assets test is used to reduce the amount of age pension that a person is entitled to receive where the value of their assets counted for assets test purposes (generally all assets other than the principal home) exceeds a certain threshold. A person’s age pension entitlement will reduce to nil on a sliding scale based on the amount by which the person’s assessable assets exceed the threshold.

ASSET ALLOCATION

The distribution of a super fund’s money across a range of asset types (shares, property, fixed interest and cash) to make up their investment portfolio. Superannuation fund trustees base their asset allocation decisions on the relative investment outlook of the asset classes as well as the investors’ risk profiles.

ASSET CLASS

A category or class of investments that your superannuation fund can hold. The major asset classes are shares, property, fixed interest and cash, which in turn can be broken down further to include, for example, domestic or international and direct or indirect property investments.

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY (APRA)

One of the Federal Government agencies which regulates superannuation funds, and other financial sector bodies, ensuring they operate within specific financial guidelines.

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION (ASIC)

One of the Federal Government agencies regulating superannuation funds and the financial services sector. ASIC’s main areas of responsibility are the Corporation’s Law and the Financial Services Reform Act. In broad terms, consumer disclosure issues (i.e. fees) are regulated by ASIC while prudential matters are regulated by APRA.

BALANCED FUND

A super fund or investment option that spreads its investments across a range of asset classes, but where usually around 70 per cent of the fund is held in shares and/or property. A balanced fund aims to produce high rates of return over the medium to long term and will usually occupy a middle position in terms of risk – more volatile than a primarily cash and fixed interest fund but less volatile than a fund investing only in shares and property. A balanced fund may also be referred to as market linked, managed, capital growth, growth, managed growth.

BASIS POINT

A commonly used measure of movement in investment return or fees/charges. One basis point equals one hundredth of one per cent. For example, if interest rates increase from 6.00 per cent to 6.25 per cent, it has moved by 25 basis points.

BENEFICIARY

A person for whose benefit assets are being held. Beneficiaries of a superannuation fund are the members and their dependents.

BENEFIT

The amount of money in the superannuation fund to which the fund member is entitled.

BUY-SELL MARGIN

The difference between the buying and selling price of shares or units in a unit trust or superannuation fund.

CONTRIBUTION FEE

Fees charged by your super fund on any contribution you deposit into the fund.

COMPLYING SUPERANNUATION FOUND

A superannuation fund that has chosen to be regulated under the Superannuation Industry (Supervision) Act 1993 (SIS) and which meets the Government’s operational standards for superannuation funds. Only Regulated Superannuation Funds can be complying funds. If a fund is not a Regulated Superannuation Fund and/or is non-complying, it is ineligible for taxation concessions and so it will be taxed at full company rates rather than the concessional superannuation fund rates.

COMPLYING PENSION

A pension arrangement that satisfies extra prescribed conditions and so qualifies for higher RBL thresholds.

CORPORATE SUPERANNUATION FUND

A superannuation fund established for the benefit of employees of a particular company, or group of companies, that is directly managed by the company. A corporate superannuation fund is sometimes referred to as an “in-house” fund.

CORPORATE TRUSTEE

Where the trustee of a superannuation fund is a company. The directors of that company are trustee directors of the superannuation fund. A corporate trustee may be a professional trustee company, a separate company specifically established to take on the responsibilities of a particular fund or the company sponsoring an employer plan.

CREDITING RATE

The interest rate allocated to individual members’ accounts after the deduction of all fees, costs and taxes. The crediting rate is based on the fund’s actual earning rate, less any amounts paid into a reserving pool, after allowances for fund costs. If the trustee has a reserving (or smoothing) policy, the fund may build up a reserve asset pool by crediting a lower amount in years of high actual earnings and using this pool to credit a higher amount than expected in years of lower actual earnings. For retail superannuation funds, the performance reported in the media is usually always the crediting rate.

CUSTODIAN

An entity, usually a company, used by your super fund to hold assets on its behalf with the main benefit being administrative efficiency and closer monitoring of invested assets. It brings together the fund’s investment portfolios, collects income, reports on asset values, and provides registered addresses of offshore investments and, if the trustees of a plan are individuals, eliminates the necessity to transfer ownership of assets to a new individual each time there is a change in the trustee.

DEATH COVER

The amount of money paid out to dependents or other beneficiaries on the death of the person covered.

DEFAULT INVESTMENT OPTION

Where a superannuation fund offers member investment choice, the default option is the option in which members’ contributions and accrued balance are invested if the member does not actually elect a specific option.

DEFINED BENEFIT FUND (PLAN)

Where a member’s retirement benefit is calculated using a formula relating years of employer service, or fund membership, and average salary during the years prior to retirement (e.g. a retiring member may receive 15 per cent of final average salary for each year of membership). As a result, end benefits do not strictly depend on investment returns as the employer-sponsor carries the long-term investment risk and so may have a greater say in how the fund invests the money than is the case in accumulation funds.

DISABLEMENT

Refers to permanent or temporary, short or long term sickness or incapacity. The definition spectrum ranges from a person’s inability to perform their normal occupation to an inability to perform each and every duty of any occupation for which they are qualified by education, training or experience. The definition applied to an individual case depends on the type of disability and the insurance policy terms and conditions. The permanent disablement definition is usually stricter than temporary disablement, meaning there are more requirements and it is more difficult to prove permanent disability than temporary disability. Superannuation and tax legislation also define ‘disablement’. The tax legislation definition is used to determine whether benefits receive concessional tax treatment on payment.

DISCRETIONARY INVESTMENT OPTION

An investment option where the individual investor selects the underlying investment product or investment manager.

DIVERSIFICATION

Refers to when investments are spread across a number of individual assets, classes of assets, countries or investment managers. The objective of diversification is to reduce total overall risk.

EARNINGS RATE

The rate of investment return achieved by a superannuation fund before the deduction of fees and taxes. Also called yield, return, return on investment, and rate of return. The earnings rate can be expressed either before tax, (i.e. based on gross earnings) or after tax (i.e. on net earnings).

ELIGIBLE TERMINATION PAYMENT (ETP)

Generally a lump sum payment from a superannuation fund or RSA or an employer to an employee when he/she ceases employment. Provided the recipient is under age 65, the ETP can be rolled over into a deferred annuity, alternative superannuation fund or RSA. For tax purposes it is split into a number of components: excessive component (tested against the individual’s RBL); pre-July 1983 component.(5 per cent of this component is taxed at the individual’s marginal tax rate); concessional component (not able to be paid from superannuation funds from.1 July 1994, although they may still be paid directly by employers); post-June 1994 invalidity component (from 1 July 1994, consists of invalidity payments and is tax free); non-qualifying component (assessable as ordinary income on the non-rollover component); Undeducted contributions (no tax is payable); post-June 1983 component (tax treatment depends on age and amount of payout).

EMPLOYER-SPONSORED FUND

A superannuation fund created by an employer or group of employers for the benefit of employees. Employer sponsored superannuation funds include corporate funds, government funds and industry funds.

ETHICAL INVESTMENT

An investment where assets are selected based upon some ethical, environmental or social criteria.

EXIT FEE

A charge levied on a member’s benefit when all or part is withdrawn from a superannuation fund or RSA. Exit fees, also called redemption fees or charges, vary substantially between funds.

FULL VESTING

Where a member is entitled to the full benefit accrued in their name in a superannuation fund.

FUND OF FUND INVESTMENT OPTION

An investment option where the investor selects a general risk profile but the super fund or master trust provider selects the underlying investments from a range of products managed by external investment managers. Can also be referred to as multi-manager options.

FUND MANAGER

An organisation that specialises in the investment of a portfolio of assets on behalf of individuals and organisations, subject to the investor’s guidelines. Also referred to as an investment manager.

GOVERNMENT SUPERANNUATION PLAN

A fund run for government employees. Similar to corporate funds except the members are public servants.

GROUP LIFE INSURANCE

Insurance arranged for a group associated in some way (e.g. superannuation fund members), for whom certain assumptions about an average state of health can be made. Premiums are often cheaper for each individual in the group than if the person had arranged their own insurance. Most funds acquire group life insurance for each member up to certain levels (the automatic cover limit) without having to provide evidence of insurability or good health.

GROWTH ASSETS

Assets having the potential to achieve capital growth over the medium to long term; generally regarded as shares and property.

GROWTH INVESTMENT MANAGER

An Investment manager that picks stocks in which to invest where prices are likely to move with the market and economic trends. Sometimes referred to as “momentum managers”.

GROWTH PENSIONS

See term allocated pensions.

HEDGE FUND

An investment fund that invests into financial instruments not normally available to mainstream investors, e.g. derivatives and options, and trades on these tactically and strategically. Reflecting these approaches, hedge funds generally do not follow normal benchmarks.

IMPLEMENTED CONSULTING

An extension of traditional asset-consulting services where investment advice and funds management are combined into the one service. Effectively, this allows a superannuation fund to delegate the role of selecting investment managers to the asset consultant. It is an extension of a super fund outsourcing its administration function

INCOME STREAM

The cash flow of an asset. Usually paid to the owner on a regular basis and may represent a large part of the return (as in the case of bonds) or a smaller part (as in the case of equities).

INDEXED INVESTMENT MANAGEMENT

When your super fund’s investment managers try to match, or replicate, the performance of the investment markets. E.g. if the Australian share market returns 10 per cent, an indexed investment manager should have earned 10 per cent. The main reason for using an indexed investment manager is that their fees can be lower.

INDUSTRY FUND

A multi-employer superannuation fund, in many cases established by parties to an industrial Award, e.g. employer associations and unions, usually covering a specific industry or range of industries.

INSURANCE

Financial protection against a possible future event with the terms of coverage specified in the policy document. Insurance normally offers protection for individuals, families and other dependents in the case of death and disability where the protection is against injury or ill-health which would prevent normal employment.

INVESTMENT MANAGER

An organisation that invests a portfolio of assets on behalf of other individuals and organisations, subject to the guidelines set out by the individual or organisation. Also referred to as a fund manager.

INVESTMENT STYLES
GROWTH

Growth investing focuses on companies with earnings that are expected to grow faster than the market average, (as company earnings may ultimately contribute to investment performance). Growth investing typically favours cutting-edge companies in dynamic industries with the potential to lead the economy in the future. Growth funds can play a central role in the diversified portfolios of investors seeking long-term capital appreciation.

VALUE

Value investing aims to generate long-term returns by taking advantage of companies whose values have been underestimated by the market and have good long-term prospects.

CORE

The core style does not rely on market biases. It aims to perform well in all market style conditions. Fund managers with a core style analyse the long-term worth of a company, identify shares selling below their valuation and determine the factors that might cause the share price to rebound. Core styled portfolios include both growth and value stocks, and at times, may show a slight bias to either growth or value, depending on market conditions.

GARP

Typically a subset of Growth. GARP stands for Growth At a Reasonable Price.

STYLE NEUTRAL

Managers that attempt to manage their portfolio with a balance of growth and value styles.

ROTATIONAL

Managers that shift their emphasis to or from growth to value companies when they see opportunity and/or risks.

MULTI-MANAGER

Portfolios built using a combination of manager styles.

INDEX

This is when the composition of a portfolio mirrors a share market index. An index manager is expected to deliver returns that match the index.

THEMATIC

Thematic managers take a “top down” approach. They identify economic trends that will affect various sectors, and invest in companies likely to benefit from those trends.

LIFE INSURANCE

Insurance that pays out a sum of money either on the death of the insured person or after a set period.

LUMP SUM

In superannuation terms, the benefit taken as a single payment, rather than taken as a pension or annuity.

LUMP SUM REASONABLE BENEFIT LIMIT (RBL)

The limit on the amount of concessionally taxed benefits an individual is able to receive over their lifetime from one or more superannuation funds, RSA’s or other sources when taken as a lump sum. In an attempt to discourage the taking of lump sum benefits, the lump sum RBL is lower than the pension RBL.

LUMP SUM TAX

The tax payable on a lump sum superannuation payout. There can be as many as six components of an Eligible Termination Payment for tax purposes.

MANAGEMENT EXPENSE RATIO (MER)

The expenses of a fund (e.g. investment, administration, trusteeship) as a proportion of the fund’s asset value.

MANAGEMENT FEE

The fee charged by a superannuation fund’s operator(s) for investment management, administration, trusteeship, etc.

MARGIN

The difference between buying and selling rates/prices of investments, e.g. units in an investment trust. Also referred to as a spread.

MARGINAL RATE OF TAX

The rate of income tax payable on a person’s top portion of income earned.

MASTER TRUST (FUND)

A trust, which allows a large number of unconnected individuals and/or companies to operate their superannuation arrangements under a common trust deed. This allows economies of scale in the operation of the trust resulting in cheaper costs for individual investors and/or companies. Life companies, banks and other specialist superannuation service providers promote master trusts. Effectively a retail super fund with member investment choice.

MAXIMUM DEDUCTIBLE CONTRIBUTION (MDC)

The maximum amount of superannuation contributions that can be made by a self-employed person, or an employer for an employee, to a complying superannuation fund or RSA and claimed as a tax deduction.

MEMBER INVESTMENT CHOICE

Where members of a superannuation fund are able to choose from a range of investment options how their money is invested.

MULTI MANAGER INVESTMENT OPTION

An investment option where the monies are assigned to several investment managers. See also Fund of Fund Investment Option.

NOMINAL RETURN

The rate of return in simple monetary terms with no allowance for inflation. For example, in a year where the investment return was 10 per cent and inflation is 8 per cent, the nominal return is 10 per cent but the real (after inflation) return is 2 per cent.

NON-COMPLYING

Where a superannuation fund fails to meet prescribed Government standards and conditions, and as a result does not qualify for concessional tax treatment. Funds can be non-complying either through choice or because there are operational shortcomings.

PASSIVE INVESTMENT MANAGEMENT

Same as indexed investment management.

PENSION

A regular periodic payment paid to an individual who meets certain qualifying conditions. A variety of Government, social security or private pensions exist.

POLICY COMMITTEE

The Superannuation Industry (Supervision) legislation requires a policy committee where a public offer fund or sub-fund has more than 49 members, or where five or more members of a public offer fund (or sub-fund) with 5 to 49 members request the formation of such a committee. A policy committee consists of equal numbers of employer and member representatives who facilitate communication between the members and the trustee and provides an avenue for members’ enquiries and views on the fund’s operation.

POOLED INVESTMENTS

Any form of investment in which a number of individuals, e.g. members of a superannuation fund, place their money with a professional investment manager to manage the total fund on their behalf but produce a return to them individually. Pooled investments may also comprise unit trusts, cash management trusts, friendly society bonds and shares.

PRACTICE

An office/company of one or more investment advisers who are authorised representatives and/or credit representatives of a licensee.

PRESERVATION

The regulatory requirement that certain superannuation benefits be maintained either in a superannuation fund or RSA until permanent retirement on or after the member reaches a certain age, the preservation age. Early release of preserved amounts may occur if the person dies, becomes disabled or gains APRA or trustee approval for early release.

REAL RATE OF RETURN

The rate of return of an investment, minus the inflation rate (usually taken as the consumer price index) over the same period. For example, if an investment produces a 10 per cent return but inflation is 8 per cent; the real return is 2 per cent.

REASONABLE BENEFIT LIMIT (RBL)

The maximum concessionally taxed superannuation benefit a person can receive over their lifetime. Superannuation benefits greater than an individual’s RBL are taxed at the highest marginal rate. RBL’s for pensions are more generous than for lump sums to encourage retirees to finance retirement via an income stream rather than cash.

REGULATED SUPERANNUATION FUND

Under the Superannuation Industry (Supervision) legislation, a fund is eligible to receive tax concessions only if it is classed as a Regulated Superannuation Fund and meets specified operational standards. A Regulated Superannuation Fund is one which: elects to comply with SIS legislation, has either a corporate trustee or pays retirement benefits as pensions, is an indefinitely continuing superannuation, pension, provident or benefit fund.

RETAIL SUPER FUND

A super fund established by a bank, life office, financial planning dealer group, or fund management group. Retail super funds are usually open to the public. Corporate master trusts are a special type of retail super fund.

RETIREMENT SAVINGS ACCOUNT

A bank – or similar – account established for holding superannuation savings. RSA’s are similar to regular bank accounts but have restrictions upon withdrawals like regular superannuation funds. RSA’s invest super savings into bank deposits and so usually pay lower rates of interest than regular super funds, but their fees are lower than regular super funds.

ROLLOVER

The transfer of all or part of an ETP into a complying superannuation fund, RSA or is used to purchase an annuity from a life company or registered organisation.

SALARY SACRIFICE

An arrangement between an employer and an employee which involves the employee giving up part of their pre-tax salary in exchange for the employer providing an alternative benefit, such as superannuation contributions.

SOLE PURPOSE TEST

The legal test used to judge a true superannuation fund. It requires that superannuation funds be maintained for the sole purpose of providing benefits on reaching retirement or preservation age, or to members’ dependents or estate on the member’s death before retirement. Other benefits approved as ‘ancillary purposes’ under the sole purpose test include the termination of employment and disablement due to ill-health. In order for a superannuation fund to qualify as a Regulated Superannuation Fund, it must comply with the sole purpose test.

STYLE

Investment managers are often said to have a “style” that describes their approach to investing. E.g. they are active or passive, or they invest in growth or value companies. Style can be very subjective and should be interpreted with caution as some styles can change as the markets change. However, investment managers who stick to their style are highly regarded.

SOCIALLY RESPONSIBLE INVESTING
SEE ETHICAL INVESTMENT.
SUPERANNUATION

A system where money is placed in a savings fund to provide for a person’s retirement.

SUPERANNUATION FUND (PLAN) (SCHEME)

In regulatory terms, a superannuation fund is defined as ‘a fund which is indefinitely continuing, and is a provident, benefit, superannuation or retirement fund; or is a public sector superannuation scheme’. It is usually governed by a trust deed and administered for the primary purpose of providing benefits for members on retirement, or alternatively, on resignation, death, disablement or other specified event. Funds complying with legislative requirements are eligible for taxation concessions.

SUPERANNUATION GUARANTEE (SG)

A prescribed minimum level of superannuation contributions that an employer must provide for employees. The Superannuation Guarantee (Administration) Act 1992 prescribes the levels. If the employer does not meet their obligations they incur a penalty charge, known as the SGC in addition to having to pay the appropriate contributions.

SUPERANNUATION GUARANTEE CHARGE (SGC)

A charge imposed under the Superannuation Guarantee Charge Act 1992.on employers who do not meet the minimum Superannuation Guarantee requirements for their employees.

SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 (SIS)

Legislation providing prudential, i.e. financial and governance, standards for superannuation funds administered by three regulators: the ATO, Australian Securities Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

SUPERANNUATION SURCHARGE

A surcharge (tax) of up to 15 per cent imposed on certain superannuation contributions, specified rollover amounts, and termination payments. The surcharge applies to people whose annual incomes exceed prescribed limits. The effect of the surcharge is that for high income earners their level of contributions tax can be doubled from 15 per cent to 30 per cent.

TERM ALLOCATED PENSION

An allocated pension type investment but with elements of the tax and social security benefits and concessions of complying pensions. Also referred to as growth pensions.

TOTAL EXPENSE RATION

A bundled measure of your super fund’s total fees and expenses expressed as a percentage of your account balance.

TRUST DEED

A document setting out the rules for the establishment and operation of a fund. Provisions cover the appointment and removal of trustees, membership rules, receiving and investing contributions, trustee discretionary powers, and benefit payments.

TRUSTEE

A person or company (corporate trustee) appointed under the terms of the trust deed to hold the trust assets for the beneficiaries and to ensure operation in accordance with the trust deed. Trustees owe a fiduciary duty to the beneficiaries. Superannuation trustees must also comply with certain legislative duties.

UNDEDUCTED CONTRIBUTIONS

A component of an eligible termination payment (ETP) consisting of contributions made to a fund or RSA after 30 June 1983 for which no tax deductions were allowed. The Undeducted contribution component of an ETP is not taxable, and does not count towards a person’s Reasonable Benefit Limit.

UNIT TRUST

A form of pooled investment trust governed by a trust deed has trustees and is promoted and managed by professional investment managers. Investors purchase units whose value is set either by the market (if the trust is listed) or by the trustee who adjust price according to valuations (if it is unlisted). Unit trusts can include property trusts, equity trusts, cash management trusts.

VALUE INVESTMENT MANAGER

Investment managers that pick stocks on the basis of the company’s inherent potential value. In a low return market value investment managers often outperform because they better identify quality companies.

WHOLESALE INVESTMENT MANAGER

An investment manager that focuses upon large investments, often from super funds. Wholesale investment managers generally are specialised companies restricted to customers with very large amounts of money to invest.

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