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Understanding why your super balance goes up and down is more than just checking fees, super contributions and insurance premiums. It’s also knowing how – and when – your super fund calculates and applies investment earnings to your super savings.
Like many aspects of superannuation, there’s no right or wrong way to calculate an account balance (and allocate investment earnings), but the most common methods used by super funds are:
- Unit pricing
- Crediting rate
Industry super funds have traditionally used crediting rates to apply investment earnings to fund members’ accounts, but many industry funds are now moving to unit pricing, which is the methodology used by most retail super funds and large investment trusts. (For information about comparing super funds, see SuperGuide articles What are the different types of super funds? and How to compare super funds in 7 easy steps and 10 key super fund fees: What are they and why am I paying them?.)
What is unit pricing?
Super funds use unit pricing or ‘unitisation’ to work out the changing dollar value of your super account. For example, if you make a $10,000 contribution into your super fund and the current unit price for the investment option you have selected is $1 per unit, you will receive 10,000 units in that investment option.
Like shares in a listed company, units in each investment option within a super fund fluctuate in value according to their daily unit price. If the investment returns for the investment option go up, the unit price also goes up, but if the investment returns go down, so does the unit price.
Super funds which are implementing unit pricing claim it is an efficient way of fairly assigning a share of the value of an investment option between all the members who have selected that option.
How does unit pricing work?
Unit pricing by a super fund can be done several ways, with some super funds offering daily unit pricing and others only calculating their unit prices once a week.
When you or your employer make a super contribution into your super fund account, you are allocated additional units based on the unit price applying for the day the super contribution is received by the super fund. The opposite happens, however, if you withdraw money from your super account, or a payment is made from your super account.
Note: When you check your account balance online, it does not reflect that day’s unit price, as this is not calculated until the end of the business day. Online super fund account balances are based on a ‘declared unit price’, which may be at least one business day behind.
Doing the math: Calculating unit prices
Super funds use a multi-step process to calculate unit prices:
- Data received. At the end of each business day, the super fund receives data on the day’s transactions and the value of the assets from the investment managers responsible for managing the super fund’s investment assets. The super fund then verifies and collates this information.
- Costs deducted. The super fund deducts costs, such as the fees paid to the investment manager and any tax on the investment earnings, to establish a ‘net asset value’ for each investment option.
- Unit price calculated. To determine the unit price for each investment option, the ‘net asset value’ is divided by the number of units currently issued for that investment option.
- Account balance calculated. The new unit price is multiplied by the number of units allocated to a super fund members’ account, to establish the current estimated value of the member’s account.
If the super fund uses weekly unit pricing, the calculation process usually takes place from the end of the business day on Friday, with the new weekly unit price applied to members’ accounts in the middle of the following week.
Note: Super funds have both a buy unit price and a sell unit price. The buy unit price is used when you or your employer make a contribution into your account, while the sell unit price is used when money is withdrawn from your account for an investment switch or to pay a direct fee. The difference between these two prices forms the buy/sell spread. For more information about buy/sell spreads, see SuperGuide article Super fees: What are buy/sell spread costs?
Annual returns and unit prices: what’s the difference?
Many super fund members are puzzled by apparent differences between the account balance and unit price they see on their super fund account when they go online, and the official annual returns printed on their super fund statement. Although these variations are usually small, they can be confusing.
Differences usually occur because super funds calculate their daily (or weekly) unit prices based on the most recent available valuations for all the assets held in their investment options. Although valuations for listed assets, like Australian shares, are normally accessible at the end of each business day, current prices for unlisted assets like property and infrastructure are not available daily. Re-valuation of unlisted assets is usually done either quarterly or every six months, so super funds use the previous value for the asset until an updated pricing is available.
For more information about listed and unlisted assets, see SuperGuide articles Super investing: What are listed and unlisted investments? and Super investing: Are you investing in infrastructure?.
What is a crediting rate?
A crediting rate – or investment return – is a percentage return that the trustee of the super fund decides investors in each investment option have earned over a set period of time. The crediting rate will vary throughout the year to reflect changes in investment markets and asset values, similar to the way unit prices fluctuate.
Each investment option within a super fund has a different crediting rate, to reflect how the assets held by that investment option have performed.
The final or annual crediting rate for each investment option is calculated by the super fund at the end of the financial year. It represents the investment return over the financial year less all the relevant investment management costs, such as tax, and the fees charged by investment managers.
Getting your money: applying the crediting rate
While it’s easy to see the annual crediting rate on your super fund statement as at 30 June, things are a little more confusing at other times.
During the rest of the year, super funds calculate an ‘interim crediting rate’ and this may be daily or weekly. Interim crediting rates can also be positive or negative depending on the performance of your chosen investment option.
The estimated account balance you see online for your super account is based on this interim crediting rate, but it is only notionally allocated to your account balance. Actual investment earnings are normally only allocated to your account balance once or twice a year – usually at 30 June and at 31 December.
What happens if I switch investment options?
If you apply to switch an investment option, your super fund will apply the interim crediting rate to your account balance for the period you were invested in that investment option.
This interim crediting rate may be more or less than the final crediting rate applied to the investment option at the end of the financial year (30 June), or at 31 December.
Warning: Each super fund has different rules on how it applies interim and final crediting rates to your super account. If you decide to make an investment switch, or exit your super fund, check these rules or seek advice before submitting a request to your super fund: when you request the change could affect your account balance.
For more information about switching investment options, see SuperGuide articles Super investing: Should you change your investment option? and Super investing: How to change your investment option and 10 key super fund fees: What are they and why am I paying them?.