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Productivity Commission finds small SMSFs worse off

Funds with smaller assets hit harder by running costs.

The investment performance of SMSFs with less than $1 million in assets is significantly worse than that of institutional funds, according to the Productivity Commission’s assessment of superannuation’s efficiency and competitiveness.

The commission’s 571-page draft report, released in late May, revealed the SMSF segment has broadly tracked the long-term investment performance of the Australian Prudential Regulation Authority (APRA)-regulated segment on average.

However, many smaller SMSFs have delivered materially lower returns on average than larger SMSFs as they faced materially higher average costs incurred due to being small.

The difference between returns from the smaller SMSFs – with less than $50,000 – and the largest – with over $2 million – exceeds 10 percentage points a year.

“It is not clear how many of these will perform better in future as they grow in size,” the draft report said.

The commission also published findings on SMSF costs, financial advice, limited recourse borrowing arrangements (LRBA) and member engagement.

The review found reported costs for SMSFs have increased over recent years and, for those with over $1 million in assets, are broadly comparable with APRA-regulated funds as a percentage of member account balances.

By contrast, costs for low-balance SMSFs are particularly high and significantly more so than APRA-regulated funds.

“These high costs are the primary cause of the poor net returns experienced by small SMSFs on average,” the report said.

“However, the number of new SMSFs with very low balances – under $100,000 – has fallen from 35 per cent of new establishments in 2010 to 23 per cent in 2016.”

When it came to the quality of financial advice provided to some members, including those with SMSFs, it was labelled “questionable”, with knowledge of the guidance and supports available to pre-retirees found to be generally lacking.

“In future, as members retire with higher balances and the diversity of options available expands, the need for tailored advice will grow,” the report said.

Furthermore, when it came to LRBAs, it found the relatively small number of SMSFs with some form of borrowing – about 7 per cent, representing 4 per cent of SMSF assets – means such borrowing is “at present unlikely to pose a material systemic risk”.

However, active monitoring, along with public reporting and discussion by the Council of Financial Regulators, is clearly warranted to ensure SMSF borrowing does not have the potential to generate systemic risks in the future, it noted.

Engagement was found to be higher among those super fund members approaching retirement, those with higher balances and owners of SMSFs.

The commission also made a draft recommendation for a “best-in-show” shortlist whereby up to 10 superannuation products should be presented to all members who are new to the workforce, or do not have a superannuation account, from which they can choose a product.

Members should not be prevented from choosing any other fund, including an SMSF, the recommendation said.

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