DIY super squeeze is back on the agenda
PORTFOLIO POINT: There is still a strong likelihood that the federal government will tighten regulations around self-managed super funds to reduce their attraction.
While Financial Services and Superannuation Minister Bill Shorten recently dismissed suggestions of imminent changes to superannuation in the recent mini-budget (after privately flagging them to a range of people), Treasury Secretary Martin Parkinson has made it plain that the industry is under a government microscope.
In a blistering critique of the industry last week, delivered in a speech to the Australian Superannuation Funds Association, Parkinson warned attendees that, as custodians of a large chunk of our national savings, they needed to lift their game.
Excessive fees, poor performance and shoddy administration forced the government’s hand to launch the Cooper Review and to implement its findings. Now, with the increase in employer contribution rates from 9 to 12%, he foreshadowed increased scrutiny.
But he also hinted at two key concerns held by the government that should have alarm bells ringing. The first was the enormous growth in self-managed super funds, which he viewed as a potential risk to the system, although he clearly linked the rise of DIY funds to dissatisfaction with professionally run funds.
For those running their own funds, this underscores the importance of stringent adherence to rules regarding administration and investment guidelines, as tighter regulation and oversight of SMSFs appears a certainty perhaps even as a means of limiting the rapid growth in the sector. As James Kirby pointed out recently, the super cash grab has been temporarily averted but don't relax just yet.
Despite the outperformance by SMSFs in six of the past seven years of all APRA registered funds – during the most tumultuous period in the global economy in almost a century – a paranoia exists within Treasury that SMSFs are an accident in waiting. More on that later.
And the second concern was the budgetary cost of the tax concessions currently in place, reinforcing the view that the government, and perhaps even an alternate administration, view superannuation primarily through the prism of foregone tax revenue rather than long-term cost savings.
“Governments over time have introduced a range of concessions that encourage increased voluntary saving in superannuation. Again, these concessions come at a cost, indeed a very significant cost.”
That does not bode well for an industry desperately in need of stability.
Consider the dizzying array of changes since the mandatory contribution scheme was introduced two decades ago.
In 1996 a superannuation surcharge for the wealthy was introduced. That was reduced during the 2001 election and eliminated five years later before its reintroduction this year. In 2007, just before the election, those over 60 did not have to pay tax when withdrawing money from super, if from a taxed source.
In recent years, voluntary contributions to superannuation at concessional tax rates have been capped; initially at $100,000, then halved to $50,000 and halved again to $25,000.
Those caps have become a source of irritation for all concerned in an endless tug of war between those wanting to save more for their retirement and Treasury officials continually under the pump to find ways to lift revenue.
Treasury estimates the tax concessions are worth about $30 billion in foregone revenue. Add the $17 billion in fees taken by the industry and you end up with a figure that is almost the same as the aggregate cost of the age pension.
That is equivalent to about 4% of GDP, almost twice the national defence budget. So little wonder it is on the radar.
A recent survey conducted by Rice Warner for the SMSF Professionals Association of Australia overwhelmingly identified legislative changes rather than financial market instability as the greatest risk to SMSF trustees.
Interestingly, Paul Keating, the architect of Australia’s modern superannuation system, addressed the very same conference. And while he focussed on the same issues as Parkinson, including the long-term cost implications of an ageing population, Keating took an entirely different tack, focussing on the long-term cost of not providing adequate funding now.
Mandatory contributions should be raised to 15%, he said. And the caps on voluntary contributions for those over 50 should be raised from the current $25,000 to $100,000, a comment that would have made Treasury officials blanch.
Like Parkinson, however, he singled out SMSFs as a potential problem, arguing that DIY funds should be required to have a minimum $600,000 balance.
Keating, instead, suggested his extra 3% contribution be paid into a “longevity fund” – presumably a Future Fund style operation – that would concentrate on providing health and aged care services for the growing band of Australians expected to live well beyond their 80s. (See James Kirby and Alan Kohler's video on Paul Keating's super vision).
This bias against SMSFs has been driven by two main concerns, both of which are unfounded. The primary one is that a widely dispersed superannuation system – where individuals run their own affairs – could more easily fall prey to fraudsters than a large institution.
The collapse of the Albury-run funds management operation Trio Capital demonstrates that is not necessarily the case. Both professionally run funds and SMSFs were caught up in the collapse. The professionals were duped, just as easily as the DIY funds. The difference, or rather discrimination, came about during compensation, when APRA regulated funds were levied to cover the losses in other APRA based funds.
The second fear is that the drain out of professionally run super funds will hinder the benefits that can be achieved by scale. Unfortunately, the past two decades has proved the opposite. Scale has done little to reduce fees in professionally run funds, which have only begun to shrink recently because of pressure from the looming introduction of MySuper. Scale has done nothing for performance.
Not only have SMSFs outperformed the professionals, they have done so on a much lower fee base, which now average at 0.54%, compared with 1.26% for fees under management among the professionals.
The discrimination against DIY funds was reinforced just a week ago when in a superannuation portability agreement, New Zealanders can now transfer their super to Australian run and APRA regulated funds.
As Andrea Slattery, chief executive of the SMSF Professionals Association says: “The best performing and lowest cost funds have been excluded.”