Almost half of Australians with self-managed super funds are undercutting their own retirements, according to last week’s Productivity Commission report into superannuation, which found many funds were too small to make comparable returns.
Despite the Australian Prudential Regulation Authority expressing concern about SMSF borrowings for at least five years, debt in the funds blew out by 47.5 per cent in the year to September 2017 as regulators tried to wind back property investment.
In its report on super, the PC said: “Large SMSFs earn broadly similar net returns to APRA-regulated funds, but smaller ones (with less than $500,000 in assets) perform significantly worse on average.”
Almost half of funds too small
“An estimated 380,000 members are in smaller SMSFs that have been established for more than two years. The members are in 200,000 separate funds, which account for 42 per cent of all SMSFs,” the commission found.
“…On average they are paying relatively high costs and facing low net returns.”
The PC’s finding is significant because it more than doubles the estimate of the minimum balance needed to make a SMSF worthwhile put forward by the industry and regulators.
Australian Securities and Investments Commission observes on its website: “The costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by APRA.”
A long-time industry observer said, “The rule of thumb is that you need between $200,000 and $250,000 to make it worthwhile”.
Jeremy Cooper, who reviewed the super system for the government in 2009, also came up with a figure of $200,000, and finance investment group Canstar has claimed the limit could be as little as $126,000.
The higher minimum balance recommended by the commission questions the wisdom of advisers who have helped 1.13 million Australians join SMSFs. It leaves 33 per cent of those people in funds that are likely too small for them to make a reasonable return.
Stephen Anthony, chief economist with Industry Super Australia, said the PC’s view “supports our analysis which showed that for all balances below $1.5 million people are likely to earn inadequate returns”.
However, Eric Koelmeyer, principal of advisory CK Partners, disagreed saying, “We advise people that they need $250,000 at least to make an SMSF worthwhile”.
The PC, he said, was trying to “dissuade people from making that step despite the maths saying it would benefit them”.
A spokesman for the SMSF Association called the PC’s recommendation “a good starting point”.
SMSF borrowings jump
Analysis by The New Daily shows that non-recourse borrowings by SMSF’s jumped dramatically in the two years to September 2018, far outstripping the growth in SMSF asset bases. In that period borrowings jumped 52.8 per cent from $27.7 billion to $42.2 billion despite SMSF assets gong up 11.9 per cent to $755 billion.
Most of the increase (47.2 per cent) occurred in the year to September 2017 when APRA and the Reserve Bank of Australia were restricting residential investment property borrowing over concerns of a real estate bubble.
It also happened in the wake of APRA’s 2014 warning that it “has long had reservations about extending the ability of superannuation funds to borrow”.
Even without the right to borrow directly, SMSFs are exposed to leverage through shares and property trusts, APRA warned.
“APRA remains of the view that the risks associated with direct leverage are incompatible with the objectives of superannuation and cannot adequately be managed within the superannuation prudential framework,” the authority stated.
In the year to September 2018, SMSF borrowing reduced because of the general investment lending restrictions, combined with the fact that most major banks pulled out of SMSF lending altogether.
Shadow Treasurer Chris Bowen responded to reports on rising SMSF debt saying, “Federal Labor has highlighted the concerns of regulators and the (2014 Murray Inquiry) for years and announced we would ban SMSF limited recourse borrowing arrangements two years ago”.
“The Liberal Party has continued to recklessly ignore the financial stability risks associated with Australia having the second highest household debt in the OECD for years now.”
Treasurer Josh Frydenberg said SMSF borrowing was under control and the government had asked “the Council of Financial Regulators to review non-recourse lending to SMSFs”.
“The government is expecting this report by the end of next month,” Mr Frydenberg said.
The New Daily is owned by Industry Super Holdings