The Productivity Commission is currently seeking submissions in its review of efficiency and competition in superannuation. Some of these submissions, naturally enough, reflect the opinions and bias of their authors. Their views are part of the public policy debate and there is nothing wrong with self-interest. However, some recent claims are so prejudiced against SMSFs they cannot go unchallenged.
In its submission, the Australian Institute of Superannuation Trustees (AIST), a body representing the industry fund sector, made a number of assertions about SMSFs. Three in particular are worth addressing.
“It is at least arguable that the collective investment profile of SMSFs represents an inefficient misallocation of capital at the national level. In particular, the heavy weighting to cash and term deposits deprives SMSF members of potential returns.”
SMSF statistics from the ATO confirm SMSFs do hold a larger proportion of assets in cash and term deposits than Australian Prudential Regulation Authority (APRA)-regulated funds. Generally, SMSF trustees take a more conservative approach to managing their own money than professional fund managers do in managing their clients’ money. SMSFs have a higher weighting towards cash and Australian shares. The relatively conservative approach of SMSF trustees stood them in good stead during the global financial crisis when they lost less value than the APRA funds. As the global and Australian economies have improved since then, APRA funds have performed better than SMSFs, but the performance trend over five years is similar.
The investment performance of SMSFs reported by the ATO is the average return on assets for half a million of these funds. This masks a spectrum of performance. In contrast to the large APRA funds where investments and returns are pooled, each SMSF has its own investment strategy and asset allocation depending on the risk appetite of the trustees and the changing circumstances of its members as they move through the work and retirement cycle. Trustees and members may well be prepared to accept a lower return for lower risk and greater certainty that their superannuation will deliver a retirement income sufficient for their needs, which they are best placed to judge.
The AIST assumes a lower investment return is economically inefficient. This may be so if efficiency is measured solely by return on assets. But there are other economic considerations. Retirement savings held by SMSFs in cash – some $157 billion at the end of 2016 – support the capitalisation and stability of banks and provide funds for bank lending to business and families. The $622 billion held in SMSFs is invested productively and predominantly in the Australian economy. A lower-than-average return on superannuation savings is not necessarily a loss to the economy if other sectors of the economy benefit from it.
Another AIST assertion claimed “the weighting of $97.9 billion to direct property (when combined with the government’s policy of permitting borrowings by SMSFs through limited recourse vehicles) has helped inflame the property market and reduced housing affordability for younger Australians”.
The property market can be influenced by many factors: the condition of the economy, employment levels, real wages, population growth, supply of land and housing stock, demographic changes, availability of finance and, not least, interest rates.
A Reserve Bank of Australia research paper, “Long-run Trends in House Price Growth”, identifies monetary policy and population growth fuelled by immigration as the significant drivers of housing prices. It does not mention SMSFs. CoreLogic estimated the total value of the Australian residential property market at the end of 2016 at $6.7 trillion. The ATO statistics for the December quarter 2016 estimated residential property assets were $26.66 billion. So SMSF residential investments amounted to 0.39 per cent of the total value of residential property. The AIST’s claim that SMSF investment is inflaming the property market is a wild exaggeration.
The final claim the AIST made requiring proper scrutiny is “the great majority of SMSFs are structured as having individual rather than corporate trustees. To the extent that the capacity of SMSF trustees declines with age, it would be expected that either the SMSF must be liquidated and assets rolled in to an APRA regulated fund, or the economic performance of the SMSFs will decline with a consequent loss of efficiency for the sector, and further losses to the economy overall.”
The capacity to navigate anything declines with age. However, most people over the age of 70 remain quite competent to make financial decisions or do any number of things that require perception, thought and judgment. If people lose mental acuity as they age, they are usually assisted by their families and by professional advisers to make appropriate decisions about the management of their financial affairs and other aspects of their lives. It would be quite arbitrary to decree that people over 70, or even older, are unable to make sensible decisions about their finances and so their SMSF accounts should be “liquidated and assets rolled in to an APRA regulated fund”.
Mike Goodall is managing director of the Self-managed Independent Super Funds Association.