By Chris Becker
The Treasury has added to the campaign to take the “self” away from Self-Managed Super Funds (SMSF or DIY) with some very interesting comments coming out Association of Superannuation Funds of Australia conference yesterday.
THE head of the federal Treasury has warned that self-managed super funds have become so popular that they could soon begin to test the integrity of the country’s superannuation system.
Dr Martin Parkinson says investors need to understand that, while self-managed super funds (SMSFs) might offer more flexibility and potentially greater returns, they can also carry greater risks.
Managers of super funds needed to ensure that they were offering investors ”value for money”, a concern that had ”clearly been a driver” of the growth of self-managed funds, he said.
”SMSFs have an important place in the market for those investors wanting control over their investments,” Dr Parkinson told the Association of Superannuation Funds of Australia conference on Wednesday.
”However, this flexibility raises some issues for all sectors of the industry to consider … [in the future] greater transparency on the implications of operating a SMSF will be important, as will be the increased accountability requirements of SMSF trustees.”
This is another in a long line of “uh oh – can’t let actual investors manage their own funds” in a nanny-like attempt to push funds back into the hands of the professional fund management industry. An industry which has managed to get a 0.21% per annum return on Balanced Funds in the last five years – from SuperRatings:
Which is something the actual creator of the superannuation system, former prime minister Paul Keating gets, both from the return and risk side:
“attacked super fund managers for investing too heavily in the stockmarket. Mr Keating said Australians expected unrealistically high returns from their super funds, which in turn encouraged fund managers to take too many risks. Australian super funds had about 2½ times the exposure to the stockmarket as European schemes, making them too exposed to the most volatile asset class, he said.
Fund managers reaped benefits in the form of increased fees when their investment decisions performed well, but were not exposed to any risk when the market plunged. ”This is pretty squalid,” Mr Keating said.
Keating has always favored a much higher compulsory superannuation contribution level – 15% of wages was the goal, currently 9% and moving to 12% – but this brings up three very big problems.
First, its too late for the Baby Boomer cohort, who have on average about $50,000 in superannuation savings, and are about to retire anyway. Secondly, those it will truly benefit – the so-called “Echo Boomers” or Gen-X crowd – are so indebted with mortgages many times the size of their parent’s generation, that any increased savings will cut into their disposable income and prolong the debt overhang. Finally, where will these increased super fund contributions go?
To the fund managers to buy already existing shares or to the melting property market.
Keating has a solution for that too:
…said the additional contribution should be placed in a long-term, government-run fund and devoted to healthcare. This was necessary, he said, because people were living far longer than was expected when the superannuation scheme was set up.
”Instead of 15 per cent wage equivalent going simply to retirement accumulations, managed by the private funds management industry, I’m suggesting that an alternative may be 12 per cent under the SG [superannuation guarantee] being managed privately and 3 per cent collected under a modified SG being managed within a government longevity insurance fund,” Mr Keating said.
In other words, a version of the Future Fund – or even possibly directly into Australian government bonds?
The introduction of MySuper (please read my overview and my concerns with this) – an attempt to codify the widespread apathetic “default” choice that 70% of Australians choose for their super fund(s) – is probably one step along the road to having mandated allocations. In other words, the government – or more likely a combination of government, Treasury (who has a fantastic forecasting record) and private fund management industry divine where and when they allocate your savings.
And if you don’t like it – as one third of you have shown resoundly, by switching to SMSF – then you will also be told where to allocate that as this is considered a “structural threat”.
This gets back to the actual softening up of the sector, where “increased accountability of trustees” will inevitably result in either tickets to operate (i.e the equivalent qualifications of a financial planner) or compulsory servicing by a licensed financial planner or even fund manager. There has already been talk to bring in minimum account requirements (Keating suggested $600K, the industry suggests $200K because its not profitable for them under that amount), which combined with an ever increasing complexity for SMSF is a clear approach by regulators to restrict the sector.
That is, taking the “yourself” out of DIY and giving the power to government and the fund management industry to control your retirement – creating a better paradise for the parasites.
Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. A free 21-day trial is available at the site. You can follow Chris on Twitter.
Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The authors have no position in any company or advertiser reference unless explicitly specified. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult someone who claims to have a qualification before making any investment decisions.