Super heavyweights

PORTFOLIO POINT: There’s nothing average about SMSFs. But what’s interesting is how much the really big SMSFs throw out the averages.

The gap between SMSFs and managed fund super could now be measured in light years. They’re in different leagues. It’s like putting up Muhammad Ali in his prime against '¦ well, me, now.

SMSFs are lean machines driven by people taking a very personal interest in their super and, more broadly, their financial futures, whereas managed fund super is for the masses. Many, though certainly far from all, are disinterested and virtually ignore its benefits (often through lack of education) until it’s too late.

But exactly how different are they? Unfortunately, it’s always been a bit of a mystery, as reliable statistics on SMSFs have traditionally been difficult to obtain.

As part of his 2010 Super System Review, Jeremy Cooper asked the ATO for useful ongoing statistics in this area, given it oversees the regulation of SMSFs. Now the data is in and some of the figures are astounding.

Average versus median

First, there’s very little about SMSFs that is not considerably above-average, starting with their sheer size. Here the tax office has provided a few new statistics, and they’re incredibly interesting.

Until now the tax office had reported the “average” size of SMSFs in Australia. At June 30, 2009, that average balance per member was about $439,000, while the average on non-SMSFs was $22,000. (We have had more recent updates on size than that, but I need to highlight the 2009 figures for the purpose of the rest of the statistics in the report.) That is, divide the total amount of money in SMSFs by the number of members and you get the average.

But averages can be very misleading, because the upper end of the market can severely distort the numbers. That is, if you have four funds with $100,000 each in them and then one fund with $4,000,000, then the “average” SMSF has $880,000 ($4.4 million divided by five).

However, the median price (the middle price, or in this case the third price) is $100,000. In this case, which is more reflective of where most super funds are? Clearly, the median. The real estate industry uses medians rather than averages for exactly same reason.

So, while the average SMSF member’s balance in 2009 was $439,000, the median was $219,000. And that tells us that a small number of mega-SMSFs are stretching the numbers. There’s a serious difference between those figures, and the median in this case is far more representative.

The tax office also included the averages and medians across the age groups.

Similarly, while the average SMSF itself has $835,580, the median SMSF has $471,329, according to the ATO. So, anyone who had been feeling inadequate about the size of their super fund can relax a little; the ATO has just reset the bar.

Asset balances by size

The largest number of super funds (about 26.5% of all SMSFs) have member asset balances between $200,000 and $500,000, while the next biggest group is between $500,000 and $1 million, accounting for 22.9% of funds.

At the upper end, just 25% of all SMSFs have balances of in excess of $1 million and only 9.3% have balances over $2 million.

From the member perspective, just 10.3% of all members have individual balances above $1 million, while nearly 30% have balances in the $200,000–500,000 range. More than 43% of individuals have account balances of less than $200,000.

Pure growth

I’ve previously covered the growth in SMSF numbers. There was a huge spike in 2006-07 (when there was a one-off opportunity to put $1 million per member into super) which has since levelled off. But the sector still retains an average net growth rate of 7–8%.

But the numbers on contributions into SMSFs is staggering. In 2008-09, $32.5 billion was tipped in, with $8.9 billion of that from employers and $23.6 billion from members; for every one dollar from employers, members contributed three dollars.

No statistic was provided for non-SMSFs. While most money into SMSFs is personal, managed fund super is overwhelmingly grown through employer Superannuation Guarantee contributions. I’d be surprised if non-SMSF members even put in $1 personally for every $3 tipped in by employers.

The average net rollovers made into SMSFs is about $7.3 billion ($10.1 billion in and $2.8 billion out).

And when it comes to the sole purpose of super funds – to provide retirement benefits – about 30% of SMSFs are in pension phase; the rest are considered to be in accumulation mode.

Larger pay packets, better performance

The overall average salary of a SMSF member for 2008-09 was $86,430, compared to the average of $48,915 for non-SMSF super members. At all age groups, the average salary is considerably higher, although it falls away to below 50% higher in the oldest age group, over 65.

While the tax office hands out warnings about the reliability of data provided before 2008, it seems that SMSF trustees have also managed to provide better performance.

For the three financial years to 2008-09, APRA-regulated funds returned 14.5%, –8.15% and –11.7%. Over those same periods, SMSFs provided a return on assets (RoA) of 16.7%, –6.3% and –6.7%.

Shortcomings

One of the major problems for SMSFs is that, like many other taxable entities, the ATO can’t provide a lot of data until SMSFs have reported, which can be up to 10 months after the close of a financial year. So, to that end, the data in the ATO’s report, Self-Managed Superannuation Funds – A Statistical Overview (2008-09), is largely based only on figures to June 30, 2009.

SMSFs may be next on the list for a review by the Parliamentary Joint Committee on Corporations and Financial Services. Committee chairman Bernie Ripoll says the DIY fund sector is ripe for examination because it’s such a fast-growing area. “In general, it’s a part of the industry that works very well, but it does have the potential for people to get into products they don’t understand,” he says. “We saw a lot of that in Trio [Capital].” One in 10 SMSFs have all of their funds in one asset class, an ATO study has found. The study, of data up to June 2009, said 35% of funds with less than $50,000 held assets in a single class which meant they weren’t protected against big falls in that sector. The tax office thought that many of these funds likely had most of their funds in cash, which could mean people were setting up SMSFs without giving much thought to creating an investment strategy. Loans to SMSF members are still the highest area of compliance problems, the ATO says. In its latest Statistical Overview it found the between 2005 and June 2010, 20% of DIY super contraventions were due to loans and financial assistance made to members. The in-house asset rule was the second-largest source of SMSF rule breaches, with 17% of all contraventions followed by separation of assets, which made up 14%. As more and more SMSFs begin to use cloud technology to store their data the issue of security must be taken more seriously, says James Vickery of I Know IT. He says once the information is out there people tend regard it as “out of sight, out of mind”, but there needs to be a clear strategy on where that data is stored. The use of Dropbox by smaller financial organisations could become a problem in future as free services don’t have the same obligation to provide the best security to their customers. The ATO has updated its Superannuation Prosecution Strategy and includes a range of ways rule-breaking SMSFs can be dealt with. As well as administrative penalties, such as conducting an audit, imposing a fine or making a fund non-compliant, it has the option to prosecute trustees and the fund civilly or criminally. If dishonesty or deceit is involved it’s usually treated as a criminal offence, which can involve jail time, whereas a civil penalty is monetary only. The difference between the two is also a matter of evidence. Criminal offences require proof beyond reasonable doubt, while civil cases require the offence to be proved on the balance of probabilities only.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

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