Inquiries into financial services can typically be guaranteed to do at least one thing – elicit criticism about SMSFs. Whether it be Cooper in 2010, Campbell in 2014 or the Productivity Commission in 2018, opponents of SMSFs took these public opportunities to either argue for their abolition or, at the very least, the imposition of far tighter regulatory control.
The criticism of SMSFs range from fears of trustees lacking investment know-how (high cash balances are an easy target without acknowledging about 50 per cent are in pension phase) to the superior investment returns of Australian Prudential Regulation Authority (APRA)-regulated funds and higher cost structures. Some even go as far to suggest SMSFs, due mainly to their ability to borrow via limited recourse borrowing arrangements, pose a systemic threat to the financial system.
Much of it tends to overreach. Although there is evidence SMSFs with low balances do, for example, have higher costs and lower returns than APRA-regulated funds, that discounts the fact many individuals who go down the SMSF path do so because of the control it bestows, even if it comes at a higher cost. Further, as surveys have shown, most are strongly focused on quickly increasing their balances.
Certainly the numbers suggest they have appeal. At 30 June 2021, ATO figures show SMSF numbers totalled 1,100,430, revealing a gradual 6.2 per cent increase over the past five years. The number of funds also increased over this period, up 6.9 per cent to 587,393. But this slower growth picked up pace in 2020/21, with 25,312 new funds being established, with the 35 to 44 age group accounting for one-third of these, the largest rise in SMSF establishments since 2017/18. Somewhat paradoxically, it seems troubled times heighten their appeal, with a similar trend occurring after the global financial crisis.
Accompanying the steady growth in funds and members has been an even sharper rise in SMSF funds under management (FUM), with net assets jumping 39.5 per cent from $602 billion at December 2016 to $840 billion at 31 December 2021.
So SMSFs are popular and, on all the available evidence, are helping meet the retirement income needs of the overwhelming number of members without being any discernible threat to the financial system. For those who still query this, they should refer to two pieces of research that conclusively show SMSFs with balances above $200,000 are competitive with APRA-regulated funds judged on both cost and performance. It’s worth noting only 14.2 per cent of SMSFs had FUM below $200,000 at 30 June 2020 and 68.8 per cent had FUM between $200,000 and $2 million.
Research by the University of Adelaide’s International Centre for Financial Services conclusively shows the investment performance of SMSFs improves as the fund balance approaches $200,000 and, on reaching this threshold, are competitive when measured against APRA-regulated funds. This research, drawn from more than 318,000 SMSFs between 1 July 2016 and 30 June 2019, is comprehensive and a compelling response to those critics of SMSF investment returns.
On the issue of costs, the actuarial firm Rice Warner ran the numbers in a 2020 report illustrating SMSFs with balances of $200,000 or more are cost competitive with industry and retail superannuation funds and those with balances of $500,000 or more are generally the cheapest alternative – an important finding considering nearly two-thirds of funds have balances exceeding $500,000. To make the point about the significance of a $200,000 balance even starker, the Rice Warner research indicated SMSFs with less than $100,000 are not competitive compared with APRA-regulated funds and those with less than $50,000 are more expensive than any alternative.
So, the question to ask is why regulatory bodies maintain such a cautious approach to establishing an SMSF. The common theme still holds the line that $500,000 or more is the appropriate amount to set up these types of funds.
The suspicion must be that the Productivity Commission’s 2018 inquiry into the efficiency and competitiveness of the superannuation system, which settled on this $500,000 figure (the draft report stated $1 million), is driving regulatory advice guidelines. For example, the Australian Securities and Investments Commission’s guidance note on SMSF costs states “on average, SMSFs with balances below $500,000 have lower returns after expenses and tax than funds regulated by APRA”.
The SMSF sector, which is heading towards $1 trillion in FUM, is thriving, tightly regulated (just ask any trustee) and, with more and more younger people entering its ranks, increasing the number of individuals who are prepared to take responsibility for their retirement incomes. It’s a success story that has now extended over a lengthening period of time and really should be recognised as such.
Per Amundsen is head of research at Thinktank.