In this post-truth world driven by social media and fake news, it seems there are few certainties beyond death and taxes. And even the latter appear to be truly optional for many. However, there is a third certainty, the enthusiasm with which Australians embrace self-managed, or DIY, superannuation funds (SMSFs).
The statistics are remarkable. There are over 600,000 SMSFs, which now account for more than 99.5% of all superannuation funds, over 30% of superannuation assets and contain an average balance of over $1 million.
What is driving this astounding growth? Could it be the generous tax breaks? I suggest not. After all, the same tax breaks apply to the superannuation system as a whole, not just to SMSFs. My thirty plus years of experience have convinced me that it’s all about a desire to exercise control. This often misguided and irrational desire has never diminished and there is no sign it will any time soon.
Even when a superior return is not achieved and when fees are excessive and financial advisers/accountants are clearly not acting in their clients’ best interests, it makes no difference. Many people still want to keep control at almost any cost.
This amazing phenomenon has given birth to an industry, representing the so-called “SMSF sector”. Recently, we have seen the rise of “SMSF educators” whose principal purpose appears to be to convince hapless (and poorer) members of the public to use SMSFs to gear into the great Australian dream on the basis that real estate is always a winner.
This growth has somewhat disturbed the traditional superannuation industry, principally inhabited by large financial institutions. Initially, their reaction was to criticise SMSFs However, in recent years, realising that they couldn’t beat them, they’ve joined them, buying ownership in existing SMSF advisory and administration firms or establishing their own. There’s considerable irony here because many fiercely independent clients have ended up in the commercial clutches of the very institutions that they were so carefully seeking to avoid in the first place!
So where does the industry go from here? There is no doubt that recent legislation moderating tax breaks at the high end has taken the edge off superannuation as a vehicle for the rapid accumulation of vast sums of tax effective savings. The days of the $30 million SMSF are over and so they should be. However, the real challenges to the SMSF sector are twofold. The first is the ability of trustees to legally borrow (gear) in order to buy real estate and other assets, such as shares. This law, which the Murray Financial System Inquiry wisely recommended be repealed, introduced a significant element of unnecessary risk into the system.
The second challenge is much greater, but is rarely discussed because its consequences are enormous and a solution is not obvious. The issue is the ageing cohort of SMSF trustees and their diminishing ability and enthusiasm to manage and control their own superannuation affairs. Soon there will tens of thousands of SMSF trustees in their 70s, 80s and beyond. This presents risks at many levels. There is the regulatory risk that trustees will fall short in their compliance obligations. That’s the least of our worries. There is also the risk of poor investment decisions caused by incompetence and diminished abilities. And then, sadly, there is the risk of elder abuse by professional advisers and relatives seeking access to the large sums of money that are typically held in SMSFs. These risks, particularly the latter, are not simply theoretical. They are a real and present danger, as acknowledged by the Australian Law Reform Commission. They are not a case of something that may happen. They will happen. I confidently predict that unless we urgently develop and implement public policy responses to stop them happening, these risks will result in scandals and personal tragedies. The problems will be widespread and will seriously damage the robust superannuation system that has been developed in this country since the 1980s. And that’s not to mention the billions of dollars in cost to the taxpayers to remedy the situation.
I do not claim to have all the answers to this challenge, but express the hope that an urgent conversation might be started in the industry to offer solutions before extensive damage is done.
Air Commodore Robert Brown, Chair ADF Financial Services Consumer Centre