Jeremy Cooper, chairman of Challenger’s retirement income area and former deputy chairman of the Australian Securities and Investments Commission, has warned that self-managed superannuation funds (SMSFs) are accumulating too much property debt, which poses a major risk to Australia’s financial system. From The AFR:
“There’s enough leverage in society anyway…We leverage up our homes, the minute you buy a share you’re building leverage, there’s a lot of personal debt around and we’re seeing people going into retirement with more debt.”
Mr Cooper… said he was against government policy allowing self-managed superannuation funds to highly gear into property investments, but it was hard to unwind.
Cooper’s warning echoes those of the draft report of the Murray Inquiry into Australia’s financial system, which last month took direct aim at SMSFs and leverage:
The use of leverage in superannuation funds to finance asset purchases is embryonic but growing. The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion. More recently, Investment Trends research found that, over the year to April 2014, the number of SMSFs using geared products increased by more than 11 per cent to 38,000…
If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.
The Murray draft report also recommended removing the ability of super funds to leverage into investments:
The general prohibition on borrowing in superannuation was introduced for sound reasons. Although levels of direct leverage in the superannuation sector are low, they are increasing. Removing direct leverage in superannuation is consistent with the concept that superannuation tax concessions should apply to funds that have been saved and not borrowed. There are ample opportunities — and tax benefits — for individuals to borrow outside superannuation.
Allowing super funds to leverage into property and other investments was arguably one of the biggest blunders of the Howard Government. In permitting leveraged investment, the Coalition effectively turned super from being a retirement savings system into a speculative vehicle, in turn dramatically increasing the riskiness of Australia’s retirement savings and financial system.
Already, cases have emerged whereby SMSFs are facing collapse due to leveraged property deals that have gone wrong. Last month, The AFR reported several cases of collapses of over-leveraged SMSF schemes that invested in off-the-plan apartments, fueled by generous incentives offered on apartment sales by developers to unauthorised and unqualified financial and property advisers that recommend their projects.
Advisers recommending self-managed super funds claim they are being bombarded by property developers with offers of up to 20 per cent commissions, top-up bonuses and other special cash incentives to encourage the super investors to buy off-the-plan apartments.
Given some SMSFs have already lost large sums during a period of strong property price appreciation, one can only shudder to think what will happen once price appreciation slows or values fall.
It is a disaster waiting to happen and highlights the need for leveraged investment in superannuation to once again be banned.