The Productivity Commission released its draft report, “Superannuation: Assessing efficiency and competitiveness”, a few weeks ago and while most of the reporting has centred on the larger funds regulated by the Australian Prudential Regulation Authority (APRA), there was a small amount of content about SMSFs.
But I have to say my take on the commission’s conclusions is that we’re just seeing the same things said of SMSFs time and time again. One of these was that only SMSFs with an asset balance of over $1 million were comparable with APRA-regulated funds with regard to cost as a percentage of member balances.
Now I actually get sick and tired of having SMSFs compared to other superannuation funds on the basis of cost. If any of these people conducting reviews took even a nanosecond to do some homework about what motivates SMSF trustees, they would know it is irrefutably the concept of control.
Study after study into the sector has come to the same conclusion, so why can’t people charged to assess the effectiveness of SMSFs get this through their thick heads and produce commentary that takes this fact into account.
Plus, cost may be a convenient way of comparing different superannuation funds, and maybe the easiest in terms of pitching like against like, but it is not a great indication as to whether a certain retirement savings vehicle is competitive and efficient.
Surely a more meaningful analysis would go some way into understanding what you get for what you pay for – the notion of value.
Research into the sector has also shown the control and engagement factors among SMSF trustees have enabled them to manage the costs involved with running their own funds fairly well, further debunking the relevance of an assessment based on cost.
One of the other findings I thought added very little value was that SMSFs with assets of less than $50,000 delivered materially lower returns on average compared to SMSFs with higher member balances.
I’m not really sure how to respond apart from suggesting this is hardly the discovery of the ages. From a common-sense perspective, doesn’t it stand to reason that any investment structure with a larger pool of assets to work with would generate better returns than ones with a smaller asset base?
Further there seems to be little consideration for the potential for SMSFs with small balances now to grow into funds with significant asset bases, perhaps even reaching the $1 million nirvana mark the commission seems to have identified.
While not looking to endorse the SMSF sector, some of the findings regarding the APRA-regulated funds actually might work to this purpose.
One of the major criticisms was a lot of members of the larger funds are having their balances eroded through the payment of risk insurance cover premiums that are potentially irrelevant for their needs.
To contrast this, it would be very rare for an SMSF to contain unnecessary risk insurance after consideration of member needs had been taken into account when formulating the fund’s investment strategy. If nothing else, the trustees and members would actually know whether or not there was insurance cover linked to the SMSF, so that’s a better outcome already.
Revenue and Financial Services Minister Kelly O’Dwyer stated upon the release of the draft report that the evidence exists that the larger funds have not always acted in the interests of their own members – another situation, barring criminal behaviour, of which SMSFs could never be accused.