They started as a side issue, but self-managed superannuation funds have now become one of the biggest elements in Australia’s retirement system – and they are poised for further growth.
When former prime minister Paul Keating set up Australia’s superannuation system back in the 1990s, he admits that self-managed funds were “almost an afterthought”. Little did he – or anyone else – envisage the pace and scale of their success.
Nowadays, for many, SMSFs are the main game in superannuation. Australian Taxation Office (ATO) figures point to record member numbers, soaring average assets and a growing interest from younger people.
INTHEBLACK has pored over reports and data on SMSFs to tell the story of an ever-growing investment platform that will shape the retirement fortunes of many Australians in the decades to come.
The numbers have it
SMSF membership has cleared the 1 million barrier and ATO figures to June 2015 show the total number of self-managed superannuation funds exceeds 557,000, a hefty rise from 440,000 in June 2011.
The ongoing embrace of the SMSF model shows no sign of abating. The SMSF Academy’s managing director Aaron Dunn points to a combination of new generations of investors, more efficient technology and the agility of SMSFs to explain their ongoing popularity. In recent years, about 36,000 new funds have on average been set up annually in Australia, a figure that Dunn sees as steady and sustainable.
“SMSFs are very nimble structures and don’t need large administrative overhauls like some of the retail and industry funds do, so they will continue to grow,” he says. “But I don’t think we’ll see a large explosion.”
Australian SMSF investors have long had a love affair with Australian equities, and they have poured almost A$1 of every A$5 of fund assets into the top 10 shares listed on the Australian Securities Exchange (ASX) during the 2015 financial year. That exposure is falling, though, as trustees start to embrace more investments in international equities through managed funds, along with better-performing, smaller-capitalisation stocks.
The SuperConcepts SMSF Investment Patterns Survey for March 2016 highlights the trend toward greater diversification, with the top 10 shares representing less than 14 per cent of total fund assets, compared with 20 per cent a year earlier.
The shift comes as trustees search for more opportunities that provide capital growth and yield, notes Peter Burgess, general manager, technical services and education, at SuperConcepts. It shows “just how adaptable SMSF investors are in changing markets and how quickly they are able to change their asset allocations,” says Burgess, adding that diversification also potentially reduces investment risks.
Younger investors and women are signing up in droves. ATO figures show the median age of SMSF members of newly established funds in 2015 fell below 50, while the lower end of the 35-44 age bracket is a hot spot. A generation of younger people who have benefited from compulsory superannuation now want to have greater control over that money and their finances in general.
Peter Burgess, of SuperConcepts, says advances in super-related technology allow younger people to be more engaged with their superannuation than in the past. “We know that if you are engaged with your super, you’re going to be drawn to the benefits of having an SMSF,” he says.
The shift to more females entering the SMSF space is also a potential game changer. With women having a longer life expectancy than men, some analysts envisage females becoming the dominant gender within SMSF memberships and dictating service needs.
However, the Women and SMSFs: Empowering and Supporting SMSF Members on Their Investment Journey study suggests that men are still far more likely than women to have initiated the establishment of their SMSF.
Pension pay day
SMSFs are an efficient and flexible tool for taking retirement benefits such as a pension. While most SMSFs (53 per cent) continue to be solely in the accumulation phase, the pension phase makes up 47 per cent. Significantly, during the five years to 2014, there was 8 per cent growth of funds moving into the full tax-free pension phase.
There has been a presumption that more and more SMSF trustees will go into the pension phase as baby boomers fund their retirement. However, proposed changes to superannuation in the May Federal Budget have the potential to affect such growth. From July next year, the government wants to cap the amount of money that can be transferred into the zero-tax retirement phase at A$1.6 million.
Deloitte Private’s self-managed superannuation leader John Randall says the policy seems reasonable but could see a flow-back of funds to the accumulation phase. If investors are in the pension phase and have exceeded the cap, they will have to move excess funds.
“We are probably going to find, if the budget announcements come true, that there will be quite a significant shift back from pension phase,” notes Randall.
Cash ranks high
Despite concerns in some quarters about risks associated with inexperienced trustees, most SMSFs are still investing relatively conservatively. Cash and term deposits represent the second-largest asset class for SMSFs, making up a total of 27 per cent by value in 2014, while equity investments are skewed towards yield rather than capital growth.
The SMSF Academy’s Aaron Dunn takes heart from the quality and consistency of management that now exists in the sector, noting that the majority of new SMSFs are being set up by less than 10 per cent of the service providers in the industry. “Gone are the days when it was a very dispersed group of professionals working in the space.”
Specialist auditors are bringing the advantages of scale and expertise; accountants and financial planners have the skills to deliver better advice for trustees than in the past. Meanwhile, industry watchdog the Australian Securities and Investments Commission is applying greater rigour to a sector in which the education of trustees and advisers alike has been ramped up.
On the fast track
Growing fund numbers and rising average assets mean SMSFs are one of the fastest-growing sectors of the Australian super industry. In the five years to June 2015, SMSF total assets rose 44 per cent, or A$181 billion, while total super assets grew by 51 per cent, or A$686 billion. SMSFs contributed 26.4 per cent to the proportion of overall growth, while industry funds accounted for 26.6 per cent.
Others believe the “golden years” for the sector may be yet to come as the changing behaviour of trustees – switching from a do-it-myself super savings approach to a help-me-do-it approach – leads to new growth.
Proving their worth
In 2013-14, SMSFs recorded a positive return on assets of 9.8 per cent, the fifth consecutive year of positive returns. These figures complement other findings that SMSFs are proving their worth, and then some.
During the seven years to June 2013, official figures from the ATO show that SMSFs outperformed their larger competitors, with an average return of 4.33 per cent compared with 3.69 per cent for the large super funds. While those returns are quite low, the period covers the global financial crisis and two consecutive years of losses.
One theory for the success is that the self-employed, professionals, small businesspeople and farmers who run many of the SMSFs are able to make tough decisions and transfer this skill to their funds.
Far from average
The average assets of Australian SMSFs have topped A$1 million, according to the ATO, climbing more than 20 per cent during the five years to June 2014 to hit A$1,066,080.
Some critics cite the figure to suggest that the tax breaks for superannuation are too generous, with the funds being used to build family wealth rather than savings for retirement.
Others prefer the view that the rising assets – and popularity – of SMSFs have gone hand in hand with improving levels of advice and technology within the sector.
They maintain that investors can more easily keep track of how their funds are tracking and also get a real-time indication of performance.
A prudent lot
Post-retirement superannuation figures for SMSFs reveal that retirees typically draw down their savings instead of taking a lump sum. Indeed, 93 per cent of retirement benefits are taken in the form of an income stream.
This percentage is substantially higher than in Australian Prudential Regulation Authority-regulated funds, where a lump-sum mentality at retirement is still common.
A declining number of SMSF wind-ups is another sign of a mature market and suggests that the right people – those with sufficient finances and skills – are setting up funds.
Superannuation assets in Australia now total more than A$2 trillion – and SMSFs are a significant part of the story, accounting for 29 per cent of total super assets, or A$590 billion.
Their presence has been credited with shaking up the super sector and limiting the rise of industry and retail funds.
Nevertheless, there is a significant level of responsibility that goes with running an SMSF, especially in the current environment where markets are more volatile than normal and are delivering relatively low yields.
For those considering this option for their superannuation, it’s important to get the right advice.
A Deloitte report, Dynamics of the Australian Superannuation System, suggests SMSFs will be the largest sector by far in the post-retirement super market, reaching A$900 billion in 2035 and eclipsing the retail segment in 2018. The reason? Deloitte says SMSFs offer more control over super and “the ability to harness the greater flexibility of family-based accounts for those members with larger account balances, in particular”.
The previous rule of thumb was that investors needed at least A$200,000 to make it worthwhile to set up an SMSF. Deloitte’s John Randall says that with technology now lowering fund administration costs, the viability cut-off also becomes a lot lower.
Battle lines drawn over default super
With its election over, Australia may see a political fight over superannuation management. In the blue corner, the Coalition is seeking to let employers select the default funds into which they pay their workers’ compulsory super. In the red corner, the unions are doing everything they can to stop the changes. The unions’ industry super funds dominate the default super sector.
The unions argue that employers could favour a bank fund simply because they recognise the brand and assume it will be better. They have also in the past accused banks of offering companies business banking inducements to win management of employees’ super contributions.
For its part, the Coalition says it wants to extend the rights of individuals to choose their own super fund, an option that does not exist for everyone covered by an enterprise agreement. Its flagged changes would likely strip the Fair Work Commission of its role in overseeing the allocation of default super funds.
Aaron Dunn, managing director of The SMSF Academy, believes the proposed changes could benefit the SMSF sector. While the changes would directly affect industry and retail funds, he says choice is a key plank in the decision-making process for individuals.
“You can see a natural attraction toward SMSFs, where an individual is also looking to take greater control over their retirement savings,” he says.
The Productivity Commission will review the default superannuation issue as part of a broader examination of the entire super system. If the Coalition wishes, it could push for its changes to come into force before the findings of that review are unveiled. In the volatile 2016 parliament, however, it will be picking its battles carefully.
Checklist for investing in your SMSF