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."
The architect of the superannuation system, former prime minister Paul Keating, also 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.
He also called for an increase in super fund contributions, of 12 per cent to 15 per cent, but he 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.
Australian super funds had about 2 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.
Both sides of politics, together with business and unions, needed to join together to redesign the super system to cope with an ageing population, he said.
Mr Keating praised Opposition Leader Tony Abbott and shadow treasurer Joe Hockey for supporting the Gillard government's move to increase super contributions from 9 per cent to 12 per cent.
"The question is, is it enough? The answer is, no," he said.
Frequently Asked Questions about this Article…
What did the federal Treasury head warn about self-managed super funds (SMSFs)?
Dr Martin Parkinson warned that SMSFs have become so popular they could test the integrity of Australia’s superannuation system. He said SMSFs can offer flexibility and potential returns, but they also carry greater risks and will require greater transparency and increased accountability for trustees.
Why are SMSF transparency and accountability important for everyday investors?
The article says SMSF flexibility raises issues across the industry, so greater transparency on the implications of operating an SMSF and stronger accountability requirements for trustees will be important to help investors understand responsibilities, risks and whether they are getting value for money.
How do SMSFs compare with other super funds in terms of control and risk?
SMSFs give investors more direct control over investments, which suits some people, but that control comes with greater responsibility and risk than many retail or industry funds. The Treasury head and others stress trustees must be aware of those risks and the need for value for money.
What concerns did Paul Keating raise about super fund managers and stockmarket exposure?
Paul Keating criticised fund managers for investing too heavily in the stockmarket, saying Australians expect unrealistically high returns which encourages managers to take too many risks. He noted Australian super funds have about twice the stockmarket exposure of European schemes, making them more exposed to a volatile asset class.
Did the article mention proposals to increase superannuation contributions?
Yes. Paul Keating called for increasing contributions from 12% to 15%, but suggested that 12% remain under the Superannuation Guarantee managed privately and 3% be collected under a modified SG and managed within a government-run longevity insurance fund devoted to healthcare.
What is the idea behind a government-run longevity insurance fund mentioned in the article?
Keating proposed putting an extra 3% of contributions into a government-run longevity insurance fund to help cover healthcare as people live longer. The concept is to manage part of retirement contributions publicly to address longevity and healthcare costs.
How do fund managers’ fee structures factor into the concerns raised in the article?
The article says fund managers reap fees when their investment decisions perform well but are not exposed to the downside when markets plunge. That imbalance was criticised as encouraging risk-taking while not sharing losses, raising questions about value for money for members.
What broader changes did speakers suggest to strengthen the superannuation system for an ageing population?
Speakers urged politicians, business and unions to work together to redesign the super system. Suggestions included increasing contributions, considering a government-managed longevity fund, reducing overexposure to volatile assets like equities, and improving transparency and trustee accountability.
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