ATO, Retirement, Superannuation

PC made SMSF findings despite flawed data

Jordan George

SMSF Association questions Productivity Commission's data quality on SMSFs.

The Productivity Commission went ahead and made significant findings regarding SMSF returns and costs despite acknowledging problems with its “fundamentally flawed” data, an industry body has argued.

The SMSF Association has criticised the Productivity Commission’s findings in its draft report on the cost-effectiveness of SMSFs, which said SMSFs will only have comparable returns to Australian Prudential Regulation Authority (APRA)-regulated superannuation funds and comparable costs where the SMSF has at least $1 million in assets.

In its submission on the Productivity Commission’s draft findings, the SMSF Association said it does not believe any final recommendations should be based on this.

Association acting chief executive Jordan George said: “Factors such as data problems, investment return calculation methodology and the retirement demographics of SMSFs compared with APRA-regulated funds make it unreasonable for the commission to conclude from the data they used that SMSFs are not cost-effective with a balance below $1 million.

“In addition, ATO cost and return calculations include SMSF establishment and advice costs that vary considerably to the costs incurred by APRA-regulated funds, in the process distorting SMSF returns, especially for new and lower-balance funds.”

George said the association opposes any limit that will reduce choice and competition in the super system, “paternalistically implying that only the wealthy know how to and are able to invest responsibly”.

The SMSF Association has made five recommendations in its submission, the first of which is given the problematic nature of data used to compare SMSFs and APRA-regulated funds, the Productivity Commission should re-examine its draft findings that SMSFs with balances under $1 million are not cost-effective and underperform.

“The commission’s draft report highlights the difference between the methodology used to estimate the rate of return for APRA-regulated superannuation funds and return on assets for SMSFs,” the submission said.

“In the draft report’s Technical Supplement 4, the commission specifies that the different methodology used can result in a 0.61 per cent difference between return calculation for SMSFs and APRA-regulated funds.”

Despite the caveats in the report, the commission still uses the long-term APRA annualised return of 5.7 per cent as a benchmark to judge SMSF returns and scale.

“This seems incongruous with the methodology issues detailed in Technical Supplement 4, which shows the impact of the different APRA fund and SMSF return methodologies,” the submission said.

The SMSF Association provides alternative data on SMSF investment costs and returns, including data from SuperConcepts and the University of Adelaide, BGL and Rice Warner.

“It’s our belief that this data is more accurate than the ATO data that the commission used in its draft report. Significantly, this data shows that SMSFs can be cost-effective below the $1 million balance,” George said.

He stressed the need to consider factors other than just analysis of net returns and costs when examining the cost-effectiveness of SMSFs, such as the cost of running an SMSF over the long term, as well as the reasons for members setting up an SMSF, including increased control and their retirement goals.

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