The Financial System Inquiry (FSI) report has recommended removing the ability of superannuation funds to use limited recourse borrowing arrangements (LRBA) to acquire assets.
In its report handed down today, the FSI cited two main objectives driving the recommendation.
The first of those was to “prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly”.
The second was to provide greater focus on superannuation as being a vehicle for retirement savings rather than a means to achieve broader wealth management goals.
Concerns over the use of LRBAs were driven by the increase in assets acquired via that type of gearing jumping from $497 million in June 2009 to $8.7 billion in June 2014.
The report detailed specific concerns with LRBAs, including the likelihood of super funds selling off other assets to fund gearing of that nature.
In turn, the FSI panel was worried that would lessen the diversification element of superannuation portfolios.
Furthermore, the report expressed its alarm LRBAs would increase risk levels in super funds as “lenders can charge higher interest rates and require personal guarantees from trustees”.
The report recommended allowing superannuation funds to borrow only for short-term liquidity management processes.