The SMSF sector has sat on the sidelines while the retail and not-for-profit sectors slug it out for their share of the funds, and hearts and minds, of consumers. While that battle may not be over, it seems some elements of the not-for-profit sector are now keen to take on SMSFs and are calling for more regulations and reviews. Jason Spits looks at whether these calls are the first shots in a new turf war or just sabre-rattling by a few vocal groups.
The SMSF sector has recently found itself in the spotlight, not because of any wrongdoing, but rather because of a taxation policy first proposed by the Labor Party more than a year ago.
That policy is the plan to ban franking credit refunds to certain retirees, and in particular SMSF members, which has been opposed by the current government, elevating it into an election issue of deep concern for many self-funded retirees, including those with an SMSF.
The focus, however, had already shifted to the SMSF sector in 2018 with the Australian Securities and Investments Commission (ASIC) and Productivity Commission conducting reviews of different aspects of the market.
While these, and other previous reviews, raised some concerns, they did not identify any deep, systemic problems or flaws nor raise any red flags about the SMSF sector (see: Where’s the smoking gun?).
Yet calls for a further review of the SMSF sector continue to be made (see: A shot across the bow) and one person who has been part of that is Australian Institute of Superannuation Trustees (AIST) chief executive Eva Scheerlinck.
Scheerlinck readily admits the super funds sector represented by the AIST, which includes industry, corporate and government funds, needs further work and “there is a lot to clear up in our own sector”.
“The royal commission raised a number of key issues for the whole superannuation sector, including how we improve our efficiency and outcomes for members,” she says.
“The commission did not cover SMSFs and we believe all parts of the superannuation system need to be efficient and effective as retirement vehicles because any failures will force people to fall back on the government and the public purse.”
She adds if another review were called, the AIST would push for it to cover the reasons for establishing an SMSF, the costs related to running a fund, the investments and performance of SMSFs, as well as the duties of trustees and how those are delegated to advisers, and why SMSFs are the only superannuation vehicle not regulated by the Australian Prudential Regulation Authority (APRA).
Unsurprisingly, following a number of major reviews that found no major problems, the two representative bodies for the SMSF sector, the SMSF Association and Self-managed Independent Superannuation Funds Association (SISFA) have rejected that view.
SISFA managing director Michael Lorimer says the calls for another review are unfounded and ill-founded and asks: “What evidence do people have on issues related to SMSFs as a whole that are systemic problems?”
Lorimer says SISFA has discussed the calls internally, but will continue to ignore them as there was nothing in the most recent reviews that highlighted deep-seated issues.
“We have heard what is being said, but are not really interested in throwing mud at another part of the superannuation sector. The industry fund sector has its own issues to deal with and may want to divert attention towards SMSFs, but unless there is a rational basis for a review, we are not going to enter into a debate,” he says.
SMSF Association chief executive John Maroney said the calls caught the body by surprise given the positive reports the SMSF sector has consistently received for close to a decade.
“Our response is ‘why?’ since the Cooper and Murray reviews and the Productivity Commission gave a clean bill of health, and also because we have yet to hear of any such calls from either the government or opposition,” Maroney says.
“The industry is also undergoing review fatigue and there are still plenty of recommendations from the royal commission and Productivity Commission that have yet to be implemented, including those related to problems in the industry funds sector, which have not gone away.”
“With FUM comes power and the more FUM for industry funds, the more power they will try to wield in the boardrooms across Australia.”
Grant Abbott, I Love SMSF
One vocal supporter of SMSFs who has regularly sounded the alarm about a pushback by industry funds is I Love SMSF director Grant Abbott, who considers further calls for review as a deflection from the issues raised by the two commissions.
“There needs to be more transparency among industry super funds and they got a leave pass at the banking royal commission,” Abbott says.
“Who manages the underlying investments in these funds, who profits from this management and how much finds its way back into the unions and then to the Labor Party by extension?”
He believes the calls have been given impetus by the possibility of a change of government at the 18 May federal election and claims the Labor Party’s taxation and superannuation policies favour the industry funds sector.
“Where we stand now is the thin edge of the wedge that Labor – the voice for industry super funds – will place between SMSFs and industry super,” he says.
“Anything to stem the flow of funds from industry super to SMSFs will be put in place. This includes getting rid of LRBAs (limited recourse borrowing arrangements), despite any negative consequences flowing from their practice. Simply put, where industry super funds don’t offer a particular option means those things will be outlawed.”
Lorimer, however, is reluctant to consider the Labor Party as anti-SMSF, noting its decisions around issues that impact on them were not actually taken through a lens of disadvantaging funds or trustees.
“There may be some weak signals coming off their refusal to support the increase from four to six members, but the chief reason stated for that was the absence of sufficient evidence to justify the change. Labor’s election commitment to ban LRBAs is also not restricted to SMSFs, as they can be used by all superannuation funds. It is just they are typically most used by SMSFs,” he says.
“There is nothing we are seeing from a governing perspective that would indicate that Labor is anti-SMSF and from our past experience with them we have not seen that as being the case.”
Despite this view, he does regard the calls from the funds and union sector as driven by a philosophical view of superannuation, and not one based on the evidence currently in hand.
“In this regard, nothing has really changed and the SMSF sector has seen this before when the big end of town went out of its way to shut down the SMSF sector in its early days. Funds were labelled as tax vehicles and people were told to leave it to the fund managers and institutions to manage super,” he says.
Maroney observes this type of messaging has been adopted by the industry funds, which have been promoting the view that, as professionals, they make better decisions because they may have exceeded average fund returns.
“This is a marketing exercise where they have spent a substantial amount on advertising their expertise, but even professional managers lose money and we have seen that happen with a number of industry funds,” he says.
“It is part of the competitive tension that exists between the different superannuation sectors and the existence of SMSFs has provided a competitive push for APRA and industry funds.”
Abbott points out the SMSF sector has never competed for market share or funds under management (FUM), in contrast to the industry super funds, which he says have aggressively competed for funds with the retail sector, and will now do so with the SMSF sector.
“Look how they besmirched the retail super funds sector. Now it is SMSFs’ turn,” he says.
“At one time in the mid-2000s, industry funds and SMSFs were the place-getters chasing retail superannuation funds. We coexisted at completely different ends of the spectrum, with the average-size balance in those days for industry funds of less than $10,000, while SMSFs were in the early $300,000 range, but with FUM comes power and the more FUM for industry funds, the more power they will try to wield in the boardrooms across Australia.”
He says this type of shift in the wider superannuation sector means that if another review is called, it must cover all superannuation vehicles and focus on the costs for services delivered, while also addressing the low level of education around super that exists in Australia.
Scheerlinck and Lorimer also see the need for information, education, advice and marketing around the provision of SMSFs to be further examined, in light of ASIC’s finding in Report 575 last year.
“The structure of SMSFs has seldom been the problem when it comes to regulation, rather it has been the mechanism behind their establishment and the reason for their use which has been of concern,” Lorimer says.
“If there is going to be any further reviews it should be in the advice area, including what reasons were given to set up an SMSF and, if they ended up in them for inappropriate reasons, should there be further tightening from an advice and licensing perspective?”
Scheerlinck says her call for review comes back to the compulsory nature of the superannuation system and the responsibility on super providers to ensure fund members are protected.
“Financial advice has been a problem, but so has the aggressive marketing from property spruikers, as well as all those organisations and companies who have been acting in their own best interests instead of those they are advising,” she says.
“This behaviour is not limited to SMSFs but, as the royal commission pointed out, it is rife across financial services and it is a problem we need to resolve once and for all.”
A shot across the bow
Many advice practitioners and service providers within the SMSF sector could be forgiven for not picking up on some of the comments calling for a further review of the SMSF sector.
With the issue of franking credits occupying the minds of many trustees, and their advisers, and the possibility of a change of government at the next federal election, the calls have received little publicity.
Interestingly, the calls that have been made by the Australian Council of Trade Unions (ACTU) and AustralianSuper chief executive Ian Silk focused mainly on the Productivity Commission’s statements around the performance of SMSFs with balances below $500,000.
What is interesting about the calls is the paucity of any real reason to further review SMSFs, apart from those issues.
When asked for further comment on both the need for another review and what such a review should cover, AustralianSuper and the ACTU declined to comment further.
As such, their initial comments are presented below:
ACTU media release – 13 March 2019: More scrutiny needed on Self-Managed Funds
The ACTU supports calls for an inquiry examining the underperformance of small self-managed super funds (SMSFs) after the Productivity Commission revealed that SMSFs with less than $500,000 perform ‘significantly worse’ than regular super funds.
Industry super funds consistently out-perform bank-owned funds and are consistently trying to find ways to provide better outcomes for members.
Too many workers are duped into starting an SMSF when the experts know accounts with relatively small balances will not perform well.
The Productivity Commission report raises questions about the value being provided to customers by SMSFs and this should be thoroughly investigated.
“There should be consistent scrutiny of any super funds which are not providing for members,” ACTU Assistant Secretary Scott Connolly said.
“The Productivity Report raises serious concerns about the performance of these funds and the security of the retirement of their members.
“The banks sell SMSFs to low super balance workers because they can charge massive fees, take a large cut of investment returns with little to no scrutiny.
“Industry funds have been shown to be consistently out-performing all other types of funds – the funds which are failing their members should be exposed to extensive scrutiny.
AustralianSuper chief executive Ian Silk, excerpts of opening address at the Conference of Major Superannuation Funds, Gold Coast, 12 March 2019
“The fact that industry funds emerged largely unscathed from the royal commission is no cause for triumphalism. There is no basis for complacency or hubris whatsoever. Our challenge is fundamental: to be the best we can be for our members,” Silk said.
“Member and community expectations are going to be higher, regulators are going to be more aggressive, political focus will be more intense and the media scrutiny will be sharper.
“We’ve all made good returns for members in a relatively benign environment,” he said, adding: “How good are we going to be at making money for members – or at least not losing it – in the more challenging investment environment of the next decade?
“We have an obligation to run the system in the public interest. The government has outsourced this to us as public policy – a compulsory system with significant tax breaks. No other industry has those advantages.”
He concluded his address with a number of key issues for the future, including that consistently underperforming funds should not continue to exist, a new recognition that the purpose of superannuation is not to save but to spend during pension phase, and “we will have a revamped SMSF sector following a full inquiry into the performance of that sector and a new, tighter regulatory regime”.
Where’s the smoking gun?
Since 2010, the government, and industry regulators have taken a close look at the SMSF sector, in part or in full, on at least five separate occasions and have yet to claim there are systemic issues within the sector.
The first of these exercises was the Super System Review, also known as the Cooper review, which considered a wide sweep of issues across the superannuation sector, stating in June 2010: “The SMSF sector is largely successful and well functioning.”
The chapter related to SMSFs went further, adding: “While significant changes are not required, there are still a number of noticeable issues, which, for the most part, do not directly relate to trustees and members, but instead to service providers and the wider regulatory framework.”
This last area of concern – higher standards of knowledge – was also picked up by the Financial Sector Inquiry (FSI), chaired by David Murray, which released its final report in November 2014 and made little mention of SMSFs.
Where the final report did mention them was in relation to whether they should be regulated by the Australian Prudential Regulation Authority – a position it rejected, stating “the defining characteristic of the SMSF sector is that trustee members are directly responsible for each fund and must take responsibility for their own decisions”.
The Australian Securities and Investments Commission (ASIC) also raised concerns about the quality of advice related to SMSFs and the experience of SMSF members in reports 575 and 576, released in June 2018, stating: “The findings from our review of SMSF advice, coupled with the results from the member research, show that the advice-giving process needs significant improvement in some areas.”
ASIC did not make any comments about the structure or regulation of SMSFs as a financial product but the issue of whether SMSFs were an appropriate vehicle for some superannuants was covered by the Productivity Commission.
In its final report, the commission raised concerns around the levels of performance for funds with balances under $500,000. However, it stated setting a minimum balance “is too blunt an instrument”, but advisers should be prepared to justify why they would recommend setting up an SMSF with a balance that remained under $500,000 beyond the initial establishment years.
The commission also picked up on LRBAs, stating the relatively small number of funds with these arrangements “means such borrowing does not currently pose a material systemic risk”, which was a position taken by the Council of Financial Regulators in its report on LRBAs released in February 2019.
It could be argued, however, that the most important view is that of the regulator of the SMSF sector – the ATO – which has yet to sound any alarms about systemic problems or structural defects.
Speaking at the opening of the SMSF Association National Conference 2019 in February, ATO superannuation assistant commissioner Dana Fleming presented a list of areas the ATO was keeping an eye on for the next 12 months.
The leading issues were illegal early release and its promotion, non-lodgement of tax returns, auditor number misuse and the performance of SMSF auditors.
Fleming said the ATO had been regulating SMSFs for 20 years and it had observed “that the vast majority of people who set up an SMSF are doing so for the right reasons” and while she outlined how the ATO managed those who failed to do the right thing, she added: “I think it’s important to remember they represent a small minority of the overall population.”