Free funds go begging

That's an immediate, guaranteed investment return of 100 per cent.

Data released by the Prudential Regulation Authority shows co-contributions and spouse contributions were $865 million for the June 2011 financial year compared to $1.34 billion for the year earlier. The figures are not given for each of the co-contribution and spouse contributions but it is likely that co-contribution is the much larger component.

Although it is a dollar-for-dollar match, the maximum that can be contributed is $1000 during the financial year. It's a matching dollar for incomes up to $31,920, after which the government's contribution reduces to zero at incomes of $61,920.

Co-contributions are very easy to organise through the super fund. The tax office assesses whether the fund member is eligible for a super co-contribution from the information supplied by the super fund and the fund member's tax return. The government co-contribution is paid into the member's super account after the end of the financial year.

While the most likely reason for the fall in co-contributions is the poor performances of investments markets, fund members may also be responding to the lowering of the government's contribution from $1.50 to $1. The reduction to $1 started in the financial year beginning in July 1, 2009. Reporting on the scheme's uptake is slow because the government's co-contribution is paid after June 30 for personal contributions made in the previous 12 months. Also from July 1, 2009, the upper income thresholds have not been indexed to keep pace with inflation. That means fewer people are eligible for the co-contribution.

As Deborah Wixted, the head of technical services at Colonial First State Investments, points out a further change was that from July 1, 2009, the government changed the definition of "income" for the thresholds used for the co-contribution to include income salary sacrificed. Prior to that time, income that was salary sacrificed was not included.

It is also likely that many lower- and middle-income families are feeling the squeeze on their finances through price rises of essential items. Any "extra" money may be going towards the mortgage or paying off credit card debt.

But these factors are not likely to be enough, on their own, to fully explain the drop in uptake. While many investors probably thought the worst of the GFC was behind us in late 2009, the continuing volatility of investment markets has made investors realise that there are not going to be any quick fixes to the problems affecting large parts of the developed world. Investors are cautious for good reason, given the poor health of the US and many European economies. Investors are expecting very low global economic growth, which will constrain companies' profit growth and share-price growth.

But fund members can always elect to have their super contributions go into their fund's cash option rather than into investment options with big exposures to shares. By parking the co-contributions in the cash option, they can take advantage of the scheme while not risking their capital. When confidence in markets returns they can switch into an investment option with exposure to growth assets.

The real power of the co-contribution scheme is for those younger fund members who are working part-time while they study or have just entered the full-time workforce. The national technical manager at ANZ's wealth management arm, OnePath, Graeme Colley, says that $1000 worth of contributions at age 20 could be worth 40 times that at retirement.

The other group is older women, many of whom do not have much super and broken work patterns. Big industry super funds with large numbers of women such as the health and community care industry fund, Hesta, have about one in 10 of their members participating in the co-contribution scheme. While the funds do a good job of promoting the scheme to their members, the government could do more to advertise the scheme's benefits.