THE head of the federal Treasury has warned that self-managed super funds have become so popular they could soon test the integrity of the country's superannuation system.
Dr Martin Parkinson says investors need to understand that self-managed super funds (SMSFs) might offer more flexibility and potentially greater returns, but they can also come with "increased risk".
He said fund managers needed to ensure they were offering investors "value for money", a concern that had "clearly been a driver" of the growth of SMSFs.
"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 . 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," he said.
The architect of the superannuation system, former prime minister Paul Keating, attacked super fund managers for investing too heavily in the stockmarket.
He said Australians expected unrealistically high returns from their funds, which encouraged managers to take too many risks.
He called for an increase in super fund contributions, from 12 to 15 per cent, but said the additional contribution should be placed in a long-term, government-run fund and devoted to healthcare, because people were living far longer than 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."
He said Australia's super funds had about 2 times the exposure to the stock market as Europe's, meaning they were too exposed to the most volatile asset class.
He said fund managers reaped benefits in the form of increased fees when investment decisions performed well, but were not exposed to downside risk when the market plunged.
"This is pretty squalid," he said.
Politics, business and unions needed to redesign the system to cope with an ageing population.
Mr Keating praised the Opposition Leader, Tony Abbott, and the shadow treasurer, Joe Hockey, for supporting the move to increase contributions from 9 per cent to 12 per cent.
"The question is, is it enough? The answer is no."
Frequently Asked Questions about this Article…
What are self-managed super funds (SMSFs) and why are SMSFs becoming more popular?
Self-managed super funds (SMSFs) are retirement funds where members act as trustees and control investment decisions. The article says SMSFs are growing in popularity because they offer more flexibility and the potential for greater returns, and investors wanting control have clearly driven much of that growth.
How could the rising popularity of SMSFs test the integrity of Australia’s superannuation system?
Dr Martin Parkinson warned that rapid growth in SMSFs could soon test the integrity of the superannuation system, because the flexibility of SMSFs raises issues around transparency, trustee accountability and the broader implications of many investors choosing to manage their own retirement savings.
What risks are associated with running an SMSF compared with traditional super funds?
According to the article, SMSFs can carry increased risk despite their flexibility, including greater responsibility for trustees, potential for poor investment decisions, and the lack of protections or oversight that larger managed funds might provide.
What did Dr Martin Parkinson say fund managers need to do in response to SMSF growth?
Dr Parkinson said fund managers need to ensure they are offering investors 'value for money' as a driver of SMSF growth, and highlighted the future importance of greater transparency on the implications of operating an SMSF and increased accountability requirements for SMSF trustees.
What criticisms did Paul Keating make about super fund managers and investment strategy?
Paul Keating criticised super fund managers for investing too heavily in the stock market, saying Australians expect unrealistically high returns which encourages managers to take too many risks, and he argued managers often benefit from upside fees without being exposed to downside risk.
Did Paul Keating propose any changes to superannuation contributions?
Yes. Keating called for higher contributions — suggesting an increase from 12% to 15% — but proposed that 12% remain under the current SG managed privately while 3% be collected under a modified SG and managed within a government-run 'longevity insurance' fund devoted to healthcare.
How exposed are Australian super funds to the stock market compared with Europe?
The article states that Australia's super funds have about two times the exposure to the stock market compared with Europe, which Keating said left them too exposed to the most volatile asset class.
As an everyday investor, what should I consider before setting up an SMSF?
The article suggests everyday investors should weigh the appeal of control and potential returns against the increased risk and responsibilities of being an SMSF trustee, and consider the need for transparency, accountability and whether fund managers are delivering value for money.
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