COVID measure outs inadequate investment strategies

SMSF investment strategies

Inadequate investment strategies were exposed by the minimum pension draw down changes introduced as part of coronavirus relief measures.

The COVID-19 financial hardship relief measure introduced last year halving minimum pensions highlighted the inadequacy of SMSF investment strategies and the practice of trustees to neglect regularly reviewing this document, a technical specialist has said.

SuperGuardian education manager Tim Miller said the need to halve the minimum pension in 2020 showed up poor investment strategies because it was an indication many SMSFs had not made satisfactory asset class allocations to ensure they had sufficient liquidity to meet their income stream drawdown commitments in the event of an adverse change affecting investment markets.

“Were pension payments actually the issue of 2020? I don’t think it necessarily was. I think [the issue] was that we hadn’t represented funds via their investment strategies appropriately to be able to deal with the situation like a loss of income from rental income, like a loss of dividends from certain companies and those sorts of things,” Miller told attendees of SuperGuardian’s latest webinar today.

“We’ve always had this strategy where [we assume] we’ll get the dividend and then pay our pension and so we haven’t planned ahead for it.

“So to me that whole global strategy [idea] is something to be mindful of.”

In addition, he pointed out that while greater attention was now being paid to the investment strategy, certain aspects of how it works were still misunderstood. He used the perceived need for a fund to have a diversified investment portfolio as an example.

“From a diversification point of view, can we take [proportionate asset allocations] into consideration and then effectively ignore it? The short answer is yes. Can we have a single-asset strategy, where our liquidity and those sorts of things are compromised? Of course you can. But [you have to] document it,” he noted.

According to Miller, the method by which an SMSF can legitimately invest in a single asset was demonstrated when the ATO sent out 17,700 letters in an effort to determine if they had an effective investment strategy.

“The point [the ATO was making] was [asking trustees] have you considered the diversification risk or lack of diversification risk [and] have you documented it. If you haven’t, then you are subject to [the relevant] penalties,” he noted.

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