Having to analyse the individual elements of superannuation structures drew Multiport head of technical services Philip La Greca into the SMSF sector. Here he discusses with Darin Tyson-Chan how some unintended consequences of regulatory reform can be positive and his desire for sector standardisation.
How did you get started in the SMSF sector?
Back in 1980, having finished university, I was looking for a job and ended up getting one at MLC in its superannuation statistics department. Actually throughout my career I’ve gained exposure to every different superannuation sector with the exception of the public sector. I gravitated toward the assistance side of things, getting a core knowledge of what superannuation funds actually look like. During my time at an actuarial consulting firm we looked at what the clients needed and how to actually source that. It meant breaking super down into its component parts and ultimately that’s what an SMSF is like. One of the key elements is support and my background has seen me gravitate toward technical services and support and education, both at an adviser and trustee level. So that’s really how it came about.
How difficult is it to maintain your technical knowledge with all the legislative changes in the sector?
It does go through different cycles so it’s not constantly crazy in that sense. So it has peaks and troughs. But certainly a big part of my day involves looking at not only what the government is saying and what regulators are saying, but also what other participants in the industry are saying. Because there’re a lot of views and lots of discussion about certain subjects and even though it’s law, it’s not always black and white. A lot of key issues are around interpretation, so I think that is what you do spend a lot of time looking at. It’s about assessing where the problems are or what the resulting consequences might be. It’s cause and effect in a lot of circumstances.
So what is your best source of technical information?
I do an awful lot of reading and probably receive around 35 newsletters, on average, a day from different people. I get details about what the government legislative office has changed, whether it’s consolidation, whether it’s new bills, whether it’s releases of rulings or terminations from various government departments. So there’s a lot of material that comes across your desk. Also a lot of it is about looking at what other people are saying; whether or not everyone is on the same page, or are there different views. You tend to find the technical services part of the industry is collegiate because we’re not really in actual competition with one another. It means people call each other to bounce questions and ideas around. I think that’s fairly important as it helps the industry get consistency in its messages and its interpretation of certain matters.
Do the calls for legislative change often lead to unintended consequences?
I think unintended consequences are par for the course, especially when things are rushed and the level of consultation in the process is inadequate. That’s where the system falls down. Often a decision is made or an idea is proposed, and it’s acted upon without saying ‘hang on, that’s going to mean this will happen’. But it’s not always negative. Back in the mid-’80s we first sat down and talked about what we called allocated pensions. Back then the whole idea of creating an account-based structure where you drew down money and there were rules about how much you drew down was totally alien. I can actually remember when the first working committee finally put a paper together with the government and sent it off, some actuaries were saying it was a waste of time and these suggestions weren’t going to go anywhere. Now we’ve got a massive concept of people taking income streams that 10 or 20 years ago was just unheard of. Super wasn’t even designed for that and now that seems to be the big driver, not getting the lump sum, but getting enough juice in the income stream. And I think that’s a great position we’re in.
You take an interest in the history of the industry and from that standpoint do you see a lot of history repeating?
There are definitely questions around whether we have gone too far in unwinding things and sometimes it does look that way. In the name of simplifying things, do we go too far and then create the problems that constraints were put in place for. It does happen, but I think part of that is also because we do also lose I guess a collective history and that’s not just in the industry. When you think about the bureaucracy and the regulators, they go through renewal as well. So the question is who has picked up their regulatory history that can say ‘hang on, this has been done before and was done because of this reason’. Business knowledge or history does have a big role to play. You know there is a whole argument that if you don’t know history, you’re damned to repeat it.
Are there any misconceptions about the sector you feel are doing it an injustice?
There’s one in particular and that is perceived tax breaks. It seems to be a really big focus that somehow the SMSF space gets better tax rates than the rest of the super industry, which, of course, is not true. It’s the same tax law, it’s just that they are using different elements, which is not really surprising considering there is a huge demographic difference. The number of people in SMSFs drawing pensions, for instance, as a proportion of the number of people with SMSFs compared with the number of people within the APRA (Australian Prudential Regulation Authority)- regulated space drawing pensions is significantly different. So is it any wonder they’re getting more exempt incomes? Still people say they’re not paying tax on their funds. Well yeah because most of them are in pension phase because most of them are older. But these are the sorts of misconceptions that can lead to a particular unnecessary rule being implemented to rectify the situation.
Do you think the demand for technical services will increase as a result of the new licensing rules for accountants?
I think it will increase, but the question I suppose will be the extent to which, and this is going to be the real challenge, the licensees participate in the training of these accountants who become licensed. That’s really going to be the key driver. And it will depend upon whether a large number of accountants choose to operate under an existing licensee because the licensee will have the responsibility for adviser competency regarding how they deliver the advice, how skilled they are initially and how the required skill level is maintained. Even accountants who choose to operate under a limited licence will still have to know about the structure of products, even though they aren’t advising on product, and understand SMSF strategies and the elements within. Another big question will be how the accounting profession will alter their own education mechanisms. So how those elements interact will be the determining factors of whether an increase in technical support demand will eventuate.
What’s the most significant change you’ve seen in the SMSF sector?
I’d nominate two changes. One would be the creation of the pensioner mentality due to the introduction of the account-based or allocated pension. It’s made a significant difference. People are still critical because they say it’s commutable to a lump sum, but the realities are while you can do so, very few people actually do. It’s a feature that is there, but doesn’t get used and yet if you took it away, it would have a major impact. So that’s clearly one. The second one would be the taxation trend of super from 1988, particularly the earnings tax. Back in 1988 you had companies paying tax on your earnings. You didn’t get a franking credit, so you were taking a capital risk if you invested in equities compared with fixed interest. What it’s actually done is given businesses a constant source of capital. I think that’s a very big change because there is now a $1.8 trillion pool of money that will help finance businesses, providing business produce the returns for them.
If you could change one aspect of the SMSF space what would it be?
I would try to standardise some of the activities and we’ve already seen some things happening, like SuperStream, starting to achieve this. By having a national mechanism for making contributions is a massive change and has the potential to be a massive cost saver. Obviously there are implementation costs, but going forward the cost impact will improve because instead of having to handle thousands of pieces of paper, you’ll have data coming electronically and that has got to be a good thing. So I think that sort of standardisation would be useful in this space.
What represents the biggest challenge to SMSFs over the next 12 months?
I would say the biggest challenge is going to be what comes out of the Financial System Inquiry and how it will impact the superannuation industry and the SMSF space. I think it’s going to throw up a whole new set of challenges, particularly around the generic problem of superannuation now being such a large pool of money with tax concessions attached. Are those tax concessions going to be targeted, reallocated or refined? How is that going to play out? What changes will come about, what will be proposed and how will that clear out the packs?
