The Financial System Inquiry’s (FSI) concern over lack of portfolio diversification within superannuation funds, resulting in a recommendation to ban the use of gearing inside SMSFs, was a worrying development, according to an industry expert.
In its final report, the FSI expressed its angst that the use of limited recourse borrowing arrangements (LRBA) would lead to a concentration of assets within an SMSF fund as trustees might be forced to sell some assets to fund the loan.
Further, the panel said it was worried LRBAs would encourage investment in single assets, such as a property, that were inflexible and illiquid in nature.
“The major concern I have there is that we’re turning into Big Brother. The Murray report goes into quite a few areas of superannuation, which really wasn’t part of its purview, and that to me is a bit of a worry,” NowInfinity principal Grant Abbott said.
“For example, they cited one submission around this diversification issue that wanted to legislate or regulate the percentage of assets that can go in any one asset class, whether it’s shares, bonds or property.
“For me, if that was put on the table, I would find it extremely abhorrent.”
Abbott was also critical of the report’s conclusion trustees could sell off other superannuation assets to finance an LRBA.
“I find it quite surprising because I’m trying to think of instances where you’d be experiencing such a significant drop in [asset] valuation where a bank would actually come back and require the sale of that asset,” he said.
He emphasised the panel had to date only handed down a series of recommendations that were yet to be enshrined in law and might actually never be passed as legislation.
“These are only recommendations and whether the government takes them up or not is unknown,” he said.
“My feeling is there is not a great desire by this government to wind back limited recourse borrowing arrangements or stop them from a certain point in time.”
