Treasury softens up SMSF for regulation

 

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.

From Fairfax:

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.

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Comments

  1. thomickersMEMBER

    to be fair though most people can’t manage SMSFs. out of all people who say they want to start an SMSF i’d say only 1 in 10 fit the criteria without messing it up.

    I work in the financial planning industry…and have seen prospective clients come to us with ATO penalties on their SMSF.

    • I tend to agree, was the same when I was a FP.

      Lots of yield chasers too who go for very high risk securities (e.g mezzazine property stuff etc) for a little extra return.

      This is the paradox that Keating describes – because those who need super (the Boomers) dont put enough in (or cant because of contribution caps, or because of massive mortgages), they take extra risks

      However an overview of SMSF allocation shows the sector has less risk exposure overall than the industry/private sectors, who are unbalanced with very high allocations to shares, and not enough in bonds/fixed interest.

      • “property stuff ”

        I would not consider property as high yield but IMO it s much more suitable option on a SMSF than stocks than can “disappear” ( yes companies go bankrupt/get removed from index and that give a very serious bias to the stock index used as reference everywhere) during the life of the SMSF, very long term view.

        i dont really get why stocks got their way into retirement funds, probably because of lack of alternative investments, we need more NBNs.

    • rather than using narrow anecdotes, why don’t you just look at the returns. SMSF massively outperformed the “professional” money management industry over the last 5 year.

      Using narrow anecdotes as evidence easily gets one to the statement all financial planners are buffoons who have recycled their careers from life insurance saleman or real estate agents.

      • thomickersMEMBER

        you would never jump into an SMSF solely based on “returns”. SMSFs add another dimension (being a trustee to yourself/maintaining arms length) to managing and that’s the part that rules most people out.

        Suitability Criteria for an SMSF should be based on:

        Adequate Balance
        Trustee obligations & compliance (important)
        Book Keeping & administration management (important)
        Investment Strategy (the fun stuff)

        • Returns (after all costs) are all that matters when managing money (ethical considerations aside).

          Obligations, compliance, bookkepping, admin – these are all just the costs of doing business (most people outsource these, I do for $700 per year – about 10bp on the average SMSF balance).

          So versus the average institional fund at 1%, I am up $6300 per year over the next 20 years = over $200k for nothing.

      • The average SMSF trustee should do it to minimise downside volatility, which is more important than higher returns, over the long run and when you decide to retire and cant make more contributions to “fill the hole”.

        Although higher returns can be a bonus if you can do it right – but what’s more important is not making as many losses as the “pros”.

        • Agreed buffets first rule; don’t lose money. Second rule: don’t forget the first rule. Try explaining that to a trader!

        • Mate, only traders who understand that rule in its every nuance survive and thrive.

          I’ll trot it out again, but George Soros has a better take on the rule:

          “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”

          • yeh i like that. HFT is a perfect example of that. its generally 50:50 getting toward the raw dice but if your right its fine. but many dumb traders survive due to market disortions and twisted reflexivity policy bias etc to run the soros theme. but i take your point. i guess you could call it a trader survivorship bias where big banks who have govts in pockets sustain the donkeys that broke the system.

      • hound, you are truly an idiot. If you knew something about SMSF’, returns, money management and so on, you would at least know that SMSF’s outperformed as they just sat in cash for the majority of the time, not because theyknew what they were doing because they perpetually are inactive.
        Pre GFC I actually saved my clients money by taking profits along the way, so your generalistic comments sounds like someone who has been screwed over by some dodgy salesman, not a professional.
        And Chris’s comments about managed funds pushing? what a load of crap. Why does any adviser have to necessarily invest through managed funds? Surely it is a priority of a good adviser to give strategy advice and not product.
        Ok, further lets look at Dixon, one of the big SMSF providers. If you had any idea, these guys cookie cut clients into having a SMSF and further push their own products for their own benefit.
        Lastly, I have seen thousands of clients over the last 15 years. 99% have NO IDEA about the responsibilities of being a trustee, dont know the rules, and quite often nor does the ‘professional’ accountant. Too many times I have assisted clients getting out o a non-compliant situation that a accountan has pushed them into.
        Hound, you are so narrow minded champ. There are bad accountants, bad doctors and bad financial advisers. Not all are. Stick to your day job and stay in cash.

  2. I have been seeing more and more SMSF set up for wrong reasons ie to buy an investment property. It might be the area that I live in, but I am not so sure.
    key issue is malinvestment, i say bring on research bonds.
    The concept that was discussed in 2008/2009 of increased age pension for small balances that are rolled into a government scheme also make sense, except when bonds are in a bubble.

  3. Beauty! So the solution is to push SMSF into Fixed interest. Returns here are already zero to negative RAT depending on how you calculate the CPI. Yet there is the great push in here for even greater financial repression by reducing interest rates even further. How can this policy possibly work?
    Now we’re going to engage in further financial repression by making investing in zero and negative return funds compulsory.
    Can someone please explain to me what is the difference between taxation and compulsory payment of funds to the Government for healthcare?

    Lastly the increase to15% will be just an added cost to employers. The powerful unions, including the PS, get themselves compensated. The powerful corporations and groups simply pass on extra cost to the less powerful including SME’s. The average person does not count Super payments by the employer as being worth anything as any benefit is too far into the future so wages tend to rise to compensate for the extra Super so-called deductions.

    We will never get REAL savings without REAL savings that result from a positive reward for saving. Anything else is just a pea and thimble trick redistributing cost and benefit.

    • it s only going to get worst as we now enter of zero interest world here as well. I ve moved my savings / TD / gold to property as it s the only thing that s going to float (and probably very well) within this 30 years time frame.

      Totally Stupid, i am glad i m not a retiree.

    • the best employer compulsory super contribution rule would be:

      age 15-30 : 9%
      age 31-50 : 12%
      age 51-65 : 15%

    • PS Note also it is the employees of SME’s that really do it tough in this country…most of them can’t afford to be without an extra 3% of their salary.
      So that just leaves SME’s carrying the full brunt of the extra 3% contribution for the whole country.

      • Erhh, take home pay (100%)+ SGC(9%) is the total remuneration package.

        That’s like saying either part or all of the 100% take home pay is also a brunt SME’s have to carry.

        Marginal SGC is directly proportional to marginal productive labour.

    • Flawse. Every economic system you could care to name is a pea and thimble trick redistributing cost and benefit.

      In policy terms, a positive ‘reward’ for saving is going to come via the taxation system. Super has been set up to have one of the most attractive tax structures for saving.

      Surely even SMEs have to give their staff a payrise in line with inflation ? If over a ten year period a 3% increase in super is subsumed into the total increase in wages, then what is the difference ?

      At some point across generations, the cost of aged care is going to have to be paid for one way or another. If aged care is seen as an ‘essential service, non-negotiable’ then either individuals prepare to fund it themselves (which most are forced to do via the sale of their home) or the government cops the liability. If people can’t rely on the value of their house to fund their aged care, and won’t save through, then what is your prefered alternative to obliging them to take out insurance ?

  4. “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.”

    Let’s call a spade a spade. The push actually is to get more money into UNION managed funds. That is the motivation. The UNIONS want their grubby hands on our money. No treasure is off limiots to the Unions, especialy while they have the Treasury benches.

    • Your spade must only have a right-handed handle then GSM.

      All of the union managed funds are managed by private, professional fund managers, most of which are owned by the big-four banks.

      Although they outperform the fully private funds, because their fees are lower.

      I think you forget that one of the biggest unions in this country is the financial industry….

      • ^^This^^

        And mark my words … all this recent talk re SMSF changes, increased compulsory SGC levy, etc, is nothing more than our local Aussie variation on a theme of what is happening in many, many countries abroad post-2008.

        The banksters are coming for your super. Using their puppets, the politicians.

        If you are under 60yo .. indeed, under 50yo .. then I’d be willing to bet you all of my super that you will never see all of yours.

      • Although they outperform the fully private funds, because their fees are lower

        That’s not just it.

        Another is they don’t mark to market their non-listed assets, which they own a large allocation to.

        Another is found out recently, is they don’t always use the same performance methodology.

      • The Prince,

        Below 12 of the 23 Directors of Australian Super Board and brief backgrounds. I suppose they exert no influence in the Fund whatsoever. A number of these comrades are die-hard Socialists. Yep they look like top professional money managers alright. I think you are quite naive as to their intent and M.O.;

        Brian Daley Member Director
        Brian Daley is a Member Director nominated by the Australian Council of Trade Unions (ACTU).

        Paul Howes Member Director
        Paul Howes is a Member Director nominated by the Australian Council of Trade Unions (ACTU). He is currently the National Secretary of the Australian Workers’ Union (AWU

        Jeff Lawrence Member Director
        Jeff Lawrence is a Member Director nominated by the Australian Council of Trade Unions (ACTU). He stepped down as the Secretary of the ACTU in May 2012, having held the position since 2007, and has served the union movement for more than 30 years.

        Simone McGurk Member Director
        Simone McGurk is a Member Director nominated by the Australian Council of Trade Unions (ACTU). She is currently the Secretary of UnionsWA and has a long history of member advocacy through her 20 years in the union movement.

        Dave Oliver Member Director
        Dave Oliver is a Member Director nominated by the Australian Council of Trade Unions (ACTU). He was elected ACTU Secretary in May 2012.

        Nixon Apple Alternate Member Director
        Nixon is a member of AustralianSuper’s Investment Committee nominated by the Australian Council of Trade Unions (ACTU). He brings a wealth of experience to the Committee having worked as a Director at the Australian Trade Commission and the National Institute of Economic and Industry Research, along with a depth of experience with the ACTU

        Mark Boyd Alternate Member Director
        Mark Boyd is an alternate Member Director of the AustralianSuper Board nominated by the Australian Council of Trade Unions (ACTU). He is currently the NSW Branch Secretary of United Voice.

        Leon Carter Alternate Member Director
        Leon Carter is an alternate Member Director of the AustralianSuper Board nominated by the Australian Council of Trade Unions (ACTU). Leon has been working in the Finance Sector Union (FSU) in various roles since 1996.

        Liam O’Brien Alternate Member Director
        Liam O’Brien is a member of the AustralianSuper Audit, Compliance and Risk Management Committee. Liam is also an alternate Member Director nominated by the Australian Council of Trade Unions (ACTU) on the AustralianSuper Board. As the National Organiser for the Australian Workers Union (AWU) Liam has a sound knowledge of industrial legislation and processes.

        Michele O’Neil Alternate Member Director
        Michele O’Neil is an alternate Member Director on the AustralianSuper Board nominated by the Australian Council of Trade Unions (ACTU). She is currently the National Secretary of the Textile Clothing and Footwear Union of Australia.

        David Whiteley Alternate Member Director
        David Whiteley is a member of the AustralianSuper Audit, Compliance and Risk Management Committee. David is also an alternate Member Director nominated by the Australian Council of Trade Unions (ACTU) of the AustralianSuper Board.

        Mike Nicolaides Non-Director Committee member
        Mike Nicolaides was appointed as a member of the Member and Employer Services Committee on 25 August 2008. Previously he was an alternate Member Director of the AustralianSuper Board and a Director on the STA Board. Mike is also currently the Assistant National Secretary of the Australian Manufacturing Workers’ Union (AMWU)

    • all industry funds have their portfolio managers outsourced although australian super is likely to manage internally in the near future (big uh oh here).

      The only worry about industry funds is the amount invested in “alternative assets/private equity” 20-30% of a default portfolio.

      MTAA/Australian Super & CBus got seriously burnt in the GFC.

      REST super has outperformed because of the private equity assets under management.

      Where industry funds really underperform is in TPD insurance, income protection & critical illness cover

  5. There is just too much money sloshing around in super to avoid the ticket clippers, no matter how you want to structure the way punters can invest. It will either be fund managers or banks or financial planners or property developers or fund administrators or accountants or consultants or any other nebulous white collared professional shark you care to think of. Someone is always going to figure out a way of get a slice of that money. You can take it for granted that Treasury will adjust their tax take as economic and political paradigms shift.

    I know that some fund Trustees haven’t exactly covered themselves in glory, but ask yourself the question, honestly, as a Trustee or manager of those funds through the 1990s and early part of the past decade, with a long-term return objective of about 8% and the expectation that your investors won’t be drawing down on those funds for 30-40 years – would you really have been making the call to reduce equities exposure to 20% in favour of cash, commodities, bonds or long volatility absolute return strategies? I don’t think so. Not while your competitors were sailing along with big equity driven returns. The Future Fund and some others were prescient enough to sit on cash or allocate away from equities from around 2006, but they’re not always going to get those calls right. Nor will any SMSF investor.

    Keating is right to identify the plainly obvious risk of people investing their SMSF funds as stupidly as a bunch of ex-Union hacks or other miscellaneous under qualified former politicians or industry leaders filling up a Board of super fund Trustees. But just as there should be an onus for the composition of those Trustees to evolve to more experienced professional investors (for whatever that’s worth), then there should be an equal expectation that SMSF investors can demonstrate an equal capacity to properly consider how they arrive at a reasonable asset allocation. If bad SMSF investments shift the risk back to the government balance sheet, then government is entitled to weigh into this.

    It’s also a big call to judge the efficacy of SMSF vs super funds based on the past five years of performance, particularly when they have been heavily titled to cash over that period, and without understanding whether certain asset biases in SMSF investors persist over the long-term.

    I also think Keating is right on finding a way to cover Aged Care costs. These costs are going to absolutely kill us in 20+ years time if things evolve along their current path. If house prices do collapse, and the bonds that aged care providers can charge effectively reduce, lowering the return they can earn from a resident, then government’s own liability to cover those costs is going to keep ratcheting up. Future users of aged care really have to start to find a way of covering those costs outside of the value of their main residence. If people aren’t going to save of their own volition, I don’t think it’s unreasonable for government to suggest they compulsory allocate a portion of income.

    • How can it possibly be a big call to judge the efficacy on the last 5 years performnce? Seriously, what do you suggest we use? Best hair, best bonus pool, longest lunch…sure the high paid “professional” bench mark huggers will win then…

      Seriously, the SMSF industry will always beat the “professionals” for 1 simple reason…

      No one cares about you money more than you…case closed

      • Best hair probably a secondary benchmark. But five years to say SMSF investors are tops ? Nup. People can still switch their allocation between asset classes with most super funds, and in indexed strategies not attracting high fees. Case still open !

        • I have crushed “pro” money mangers in my SMSF in last five years. You go on about asset allocation though the 90s and herding strategies and peer benchmarking and then dismiss the last 5 years as not indicative of performance. Well considering this is a six sigma event I would say its pretty damn indicative of SMSF trustees ability to see what is going on and acting responsibly. Longer time frames will assist I agree, however these type of events take 1-2 decades to play out, so lets review in 2020. Constantly changing rules will result in widespread side pocketing is my suspicion and or flight of capital by high net worths.

          • Mr Wonk d’Energie.

            The experience of SMSF v ‘professional’ funds over past five years may be illustrative of their superior read of markets, but as you say we won’t really know for sure for another 10+ years.

            It’s not hard to crush pro managers, because SMSF aren’t answerable to the same commercial considerations, and can turn their allocations around more nimbly. Which is a great luxury to have, and you wouldn’t want to exclude in principle people from being able to manage that risk for themselves. Most people probably dont’ realise that they already have that ability within a Super fund environment to create their own allocations.

            But I suspect that over time, if the weight of money migrated over to SMSFs – I think in the long run the same peer benchmarked risks would emerge in SMSFs because people will largely still rely on the advice of investment ‘professionals’ and display the same behavioural biases around shifting asset allocations.

  6. The purpose of superannuation when devised by Paul Keating in 1985 was quite simple – to protect and enrich the Sydney finance industry by feeding them captive customers.

    When the Victorian Liberals ruled Australia from 1949 to 1972 it was Melbourne’s manufacturing industries which were protected – through import tariffs. That may have damaged the country as a whole, but it fulfilled its primary purpose of enriching the friends of those in power.

    Manufacturing protection was a system that collapsed under the weight of its own inefficiency. But rent-seeking is the defining characteristic of Australia. It didn’t go away. It simply moved its base from Melbourne to Sydney, and from manufacturing to finance.

    Superannuation has failed in almost every respect – except that for which it was devised.

    It began as a voluntary scheme, but it was soon made compulsory for wage and salary earners.

    It was originally a “savings” scheme, but for those born after 1960 the age at which they can access those savings is pushed out ever further. Realistically, young people are never going to see any of the money they believe they are putting into a “savings” scheme. They will die with large balances unaccessed, and the Government will reclaim them on the grounds that “tax-advantaged” savings should not be a windfall to their heirs. It will be a de facto death duty.

    It has not increased national savings levels.

    Much of the so-called savings has in fact been recycled straight back to government through the sale of government monopolies, through tax-farming arrangements (such as the sale of road-tolling rights), and through hideously expensive public-private “partnerships” to finance government capital expenditure.

    The one and only thing that superannuation has succeeded in doing is the one thing it was set up to do – enriching fund managers and their support industries (mainly in Sydney) by feeding them captive customers who must pay at least 1% pa year-in-and-year-out on what they are told is their “savings”.

    Like Melbourne manufacturing protection, it is a system that will eventually collapse under the weight of its own inefficiency.

    • You’re wrong. It’s also enriching fund managers and support industries in London, Singapore, New York, Zurich and elsewhere.

      If it wasn’t compulsory saving, and every citizen of their own volition was saving 9% of their wages, and allocating broadly in the same way as professional fund managers, then surely the effect is the same in terms of recycling ? And the sale of government monopolies (CBA, Telstra and Qantas) can have only subsumed a very small portion of the 1.5 trillion. Infrastructure spend from super has always been a small allocation of most funds.

      I think it’s fair to say that the majority has propped up secondary equity markets, but those local fund managers are getting squeezed right down on fees, and will continue to do so as more funds go passive. And having made the decision to outsource the building of actual things (outside of houses) to lower cost countries, if we aren’t going to give the punters something to do by pushing around spreadsheets, then perhaps we should recycle that super into funding research and investment in new industries that will allow us to let the finance sector die away.

    • superannuation has succeeded in doing is the one thing it was set up to do – enriching fund managers and their support industries
      Sounds about right. Politicians only look forward 3 or 4 years. When one claims to be concerned about something 30 years away, I am suspicious.

  7. Very ordinary article from someone who is pushing his own agenda. Huge lack of knowledge about what is really happening within the SMSF sector.