Category: Features

Response to Treasury Discussion Paper: Three-yearly audit cycle for some self-managed superannuation funds

Copyright © Jim Bonham 2018

1 Summary

As an SMSF trustee, I am concerned about the proposal to introduce three-year audits for some SMSFs, primarily for the following reasons:

  • None of the three benefits claimed for the proposal (reduction of compliance burden, reduction in audit cost, and rewarding the timely submission of SARs) withstands examination.
  • Audit management will become more complex for the trustee, increasing the risk of inadvertent rule breaches.

I would not opt for a three year audit of my SMSF if this proposal becomes law.

2 Introduction

My wife and I have an SMSF under a corporate trustee structure. The fund was started in 2003 and has been totally in pension mode for several years. The SMSF and some investments outside superannuation will be our only sources of income for the rest of our lives, and this does tend to focus the mind.

Each year, we provide the fund’s financial and share-trading data to our accountant who prepares the tax return etc, sends us a draft for checking and then forwards everything to the auditor. Following satisfactory audit (we have never had a problem), the SAR is then forwarded to the ATO without further intervention by us.

Given the complexity and instability of superannuation rules, we feel the multiple checkpoints in this process provide good protection against unintentional infringements which could see us in trouble with the ATO – a potentially costly and stressful outcome we are very keen to avoid. They can also help protect us against unwittingly increasing our investment risks.

The proposal to introduce an optional three year audit cycle for some SMSFs (which would include our fund) is therefore of considerable concern to us. We see heightened risk with no material compensatory benefit. Given the choice, we would not opt for three-yearly audits.

Below I provide more detailed comments in response to the specific Consultation Questions raised in the Discussion Paper

On 26 July, I had the opportunity to participate in a Treasury round-table discussion about this proposal, which I appreciated very much. I was there to present a trustee’s view point, not that of any organisation, and I made some of the following comments at that meeting.

3 Consultation questions

3.1 How are audit costs and fees expected to change for SMSF trustees that move to three-year cycles?

This is a critical question, there being no point going ahead with the proposal if costs are to rise, so I would like to discuss it in detail with reference to each of the three benefits claimed and the two concerns mentioned on Page 3 of the Discussion Paper.

3.1.1 Benefit 1: “A reduction in the compliance burden …”

I cannot see the basis for this claim, given the following comments from other parts of the discussion paper:

  • “It is proposed that eligibility … will be based on self-assessment” (Page 4)
  • “If the ATO becomes aware that a SMSF trustee has incorrectly assessed their eligibility for a three-yearly audit cycle, … the ATO will notify the trustee that an audit is required and consider further action if necessary” (Page 4)
  • “ .. a number of events can represent a material change to the situation of the fund and may increase the risk of a breach …” (Page 5)
  • “If a key event falls in a year when an SMSF is not otherwise to be audited, the SMSF will be required to obtain an audit … required to cover all financial years since the SMSF’s last audit” (Page 5)
  • Eight “possible key events” are listed on Page 5, with a request for suggestions.

It is crystal clear that moving some SMSFs to a three-year audit cycle will create a more complex compliance landscape.

This must increase the risk of inadvertent breaches. Trustees who opt for three-yearly audits will have to become aware of a greater number of rules, and be vigilant that they do not inadvertently fail to report a key event.

Both these aspects of three-year audits increase the compliance burden, rather than decreasing it.

In addition, the appalling instability of superannuation legislation suggests there is a very high likelihood that, if three-year audits are introduced, the list of key events will change and be extended over time – further exacerbating compliance worry and risk.

It is unlikely that the trustee or accountant will be spared any administrative effort by moving to a three-year audit cycle, because exactly the same set of transactions will eventually have to be presented for audit as with annual audits.

The second part of the first claimed benefit “… while maintaining appropriate visibility of errors in financial statements and regulatory breaches” just does not make sense. How can visibility be maintained if a transaction is not audited for two or three years?

3.1.2 Benefit 2: “A potential reduction in administrative costs due to less frequent audits…”

It is very hard to see where significant savings could come from:

  • Auditing 3 years’ data at once requires examining exactly the same set of transactions as for three one-year audits. The fact that the audit frequency has changed just means that SMSFs will receive one bill instead of three, but the total cost over three years must be at least as high.
  • Audit fees are themselves not a major cost for most SMSFs. Even if some cost saving were to be achieved, its magnitude could only be trivial.
  • There are some obvious ways in which audit costs must increase under this proposal:
    • Both accountants and auditors will find it more difficult to manage a mixture of clients on 1-year, 2-year and 3-year audits, rather than having everyone on a 1-year cycle. This must push costs up for all clients, not just those who opt for three-year audits.
    • Resolving errors, or even simple ambiguities, in data which is 2 or 3 years old will be more difficult, and therefore more costly, than when all data is no more than a year old and issues are still top-of-mind.

3.1.3 Benefit 3: “An incentive for SMSF trustees to submit SARs in a timelier manner”

The only benefit offered is the unsubstantiated hope that some cost savings will result, but even if that turns out to be true the savings will be small.

Such a nebulous offer is most unlikely to influence the trustee who has already indicated a disdain for fulfilling obligations on time and an indifference to potential penalties.

Late submission is really an administrative issue for the ATO, and it is something the ATO must face with every function it supervises. Complicating the audit cycle for SMSFs is not the way to deal with it.

3.1.4 Concern 1: “… increased non-compliance …”

Certainly the risk of inadvertent non-compliance is increased as discussed above.

The risk of deliberate non-compliance may also increase, because a more complex operating environment creates opportunities.

3.1.5 Concern 2: “… alter the workflow of the SMSF audit industry … lead[ing] to a reduction in the number of businesses specialising in SMSF audits”

That certainly seems likely, and if it occurs the reduced competitive forces will probably push audit costs up further across the market.

3.1.6 Mitigation: “… concerns will be mitigated by appropriate eligibility criteria and, if necessary, transitional arrangements”

I doubt that either eligibility criteria or transitional arrangements will address concerns about cost increases and complexity.

3.2 Do you consider an alternative definition of ‘clear audit reports’ should be adopted? Why?

Clear audits and timeliness are proposed as the criteria by which SMSFs would qualify for a three-year audit cycle.

There is an implied assumption here that SMSFs with a history of clear audit reports and timely submissions are more likely than not to continue that behaviour. Intuitively that seems likely, until one considers the very high number (40%) of SMSFs that the ATO says reported late in a three year period. The assumption ought to be tested, and I assume that ATO has the data to do so.

If one were approaching this problem for the first time, without preconceptions, one might expect that the simplicity of an SMSF’s structure and its transaction history would be a far better predictor of whether or not it routinely submits on time and receives clear audits.

However, simple SMSFs are cheaper to audit, reducing the potential (if any) for cost savings.

 

3.3 What is the most appropriate definition of timely submission of a SAR? Why?

I think it is consistent with the spirit of this proposal to require “timely submission” to mean three consecutive years without a late submission.

3.4 What should be considered a key event for a SMSF that would trigger the need for an audit report in that year? Which events present the most significant compliance risk?

I don’t have a view on what should constitute key events, as I think that requires a professional opinion, but the following principles are critical from a trustee’s point of view:

  • The list of key events should be confined to items which, if not audited promptly, may cause serious problems later.
  • Procedures should be put in place to ensure that the list of key events is kept as stable as possible, and is not allowed to grow unnecessarily.
  • If trustees are to be responsible for self-assessment of their eligibility for 3-year audits, then it is essential that
    • key events do not include events which are outside the trustee’s control
    • key events do not include events of which the trustee may be unaware
    • key events are easily understood by trustees
    • it is easy for trustees to keep up to date with the list of key events

3.5 Should arrangements be put in place to manage transition to three-yearly audits for some SMSFs? If so, what metric should be used to stagger the introduction to the measure?

Although I do not support the proposal, if it does become law then the method of introduction of the process should be a business decision for accountants and auditors.

Trying to impose some system (like odd and even number plates in a fuel shortage?) seems likely to make a complex issue even more so.

3.6 Are there any other issues that should be considered in policy development?

The superannuation regulatory environment is excessively complicated and has become severely unstable: grandfathering has been virtually abandoned and frequent changes have become the order of the day, in an area that is supposed to guide investment and income provision on a generational timescale. Such instability is not in the national interest.

In this environment the only way to avoid serious unintended consequences of proposed changes is to engage in a thorough process of socialization before they are introduced. To that end, discussion papers such as the present one are very valuable, and I appreciate having had the opportunity to contribute.

The rider I would add to that, though, is that it would have been far better – from both a political and a process point of view – to have had this public discussion before the Budget announcement, rather than after it.

4 About the author

Jim Bonham is a retired scientist and manager. He is deeply concerned about the way retirement funding has developed in recent years, particularly with respect to frequent changes in superannuation legislation made with inadequate consultation and no respect for grandfathering.

Why self-managed super funds must be encouraged, not curbed

The Australian

25 July 2018

Glenda Korporaal – Associate Editor (Business)

For Melbourne retirees Alistair and Merrill Lee-Archer, having a self-managed super fund is all part of managing their retirement savings and being independent.

Alistair, who worked as a human resources manager, and Merrill, a vice-principle in the Victorian education system, were both 55 when they retired.

They opted to set up their fund 15 years ago, a few months after Merrill retired, after doing some homework about what was involved in SMSFs. They still live in the modest house in Mooroolbark, in east Melbourne, which they bought in the early years of their marriage 50 years ago and paid off before they retired, opting not to move to a more expensive suburb closer into town.

Since then they have worked together on their investments through their SMSF in between spending time with their three children, eight grandchildren, golfing and a few overseas trips.

When they rolled their superannuation into their SMSF, its combined balance was well below the $1 million which the Productivity Commission says is the minimum cost-effective balance for an SMSF.

They disagree with this argument. And as they point out, when people set up their SMSFs funds they may have relatively low balances, but the goal is to manage their fund well and grow the balance.

They believe their SMSF is as cost-efficient as any other super fund. They also believe they have managed it with better returns than other super funds. But its big attraction is the independence and control it gives them to manage their own financial affairs in retirement free of outside interference.

More than a million Australians already have self-managed super funds with a total of more than $700 billion in funds.

Self-managed funds are not for everyone. In fact they are not for many people, particularly those not financially literate or prepared to put in the work to manage the fund and meet the necessary compliance requirements.

But their popularity among a certain sector of the population — financially literate professionals and retired professionals like the Lee-Archers — are a serious competitive threat to the established sector — both industry super funds and retail funds.

Moves to further restrain the growth of the industry with talk of government mandated minimum balances for people to set up SMSFs will only further play into the hands of their competitors in the APRA regulated sector.

The super industry is a competitive one. Costs are coming down. There is a lot of money at stake. Many people who have self- managed super funds believe they are at least as competitive as APRA-regulated funds on a cost basis, if not cheaper.

But costs are only part of the issue for retirees and people saving for their retirement. Retirees like the Lee-Archers see managing their super fund as like managing their own business and being in control of their lives, independent of government.

The issue of whether there should be minimum balances for SMSFs has been raised following the recent draft report from the Productivity Commission, which has been looking into the efficiency of the super system. It compared figures from the ATO about SMSFs and figures from APRA about other super funds and argues that SMSFs are not cost-effective when it comes to balances of less than $1m.

There is a valid argument that people with very low balances would be better off with conventional super funds. SMSFs do involve start up costs, payments to advisers such as accountants and possibly financial planners and other professionals, as well as a commitment of time and effort by the trustees.

But critics put the minimum cost-efficient level too high. The SMSF Association argues that balances of $200,000 would still make self-managed funds appropriate for people, particularly those with some way to go towards retirement.

The SMSF Association will today release a detailed paper which challenges the Productivity Commission’s calculations in making the comparisons. It argues that the approach used by the commission results in an effective bias towards the performance of the APRA regulated funds.

There is the issue of unscrupulous planners talking people into setting up SMSFs who really shouldn’t have one.

But the issue there should be on the regulation of the planners who are now legally supposed to be acting in the best interests of their clients — not to restrict the options of people saving for their retirement.

There has also been a real issue of property spruikers driving people to start self-managed funds and then use them to gear up to buy property. But again that should be addressed by controls on SMSFs borrowing to buy property, which is something many have recommended, including the last inquiry into the financial system headed by David Murray.

And of course people managing their own super may do it badly and lose money.

But we live in an economy where people should be encouraged to be independent of the government in retirement and that includes managing their own money.

SMSF members are highly engaged in their fund and their overall financial planning.

SMSFs only suit a specific sector of the market but they play an important competitive role in the sector, particularly for those who don’t want to bank on the government for their retirement.

Chairs silent on super gouging by big four and AMP

The Australian

21 July 2018

Anthony Klan

The chairmen of each of the big four banks and AMP, which manage more than $240 billion of the public’s superannuation savings across six main super funds, have all refused to say whether they ­believe the executives of those ­financial giants have broken the law by engaging in wide-scale gouging of millions of their super members.

The revelations come as The Weekend Australian can reveal the federal government’s long-delayed proposed changes to superannuation law — nominally aimed at closing a decades-old legal loophole that prevents super trustees from facing any penalties should they break the law — also contain a potential loophole.

The Weekend Australian has revealed widespread gouging by the big four banks, such as paying super members returns on simple “cash” investments as low as one-quarter of actual market rates — in some cases even negative ­returns — has had a devastating effect on long-term returns.

Audited performance data provided to the Australian Prudential Regulation Authority by Westpac, NAB, CBA, ANZ, AMP and IOOF shows the biggest super funds operated by each of those institutions — comprising five million member accounts — delivered average annual returns to members of between 2.1 per cent and 3.1 per cent over the ­decade to June 30 last year.

Those returns were roughly half the market rate for the types of investments those funds had actually made, roughly half the returns achieved by the major so-called “industry” funds such as AustralianSuper, and roughly half the returns of the super funds ANZ, CBA and NAB run for their own staff members.

Under the Superannuation Industry (Supervision) Act 1993, trustees must abide by strict rules, such as always acting in the best interests of members, and placing the interests of members ahead of the interests of the bank or company they work for, should any conflict arise.

The act stipulates penalties of up to five years’ jail and “punitive” damages, but as previously revealed, there was a carve-out in the law that meant the penalties did not apply to trustees of big super funds, and no federal government since 1993 has closed that loophole.

CBA chairman Catherine Livingstone, Westpac chairman Lindsay Maxstead, ANZ chairman David Gonski, NAB chairman Ken Henry — a former federal Treasury secretary — and AMP’s interim executive chairman Mike Wilkins, installed when the group’s chairman and chief executive stood down following recent revelations of fee-gouging by the group, all declined to respond to written questions.

Media representatives of each of those major banks and AMP would not confirm they had passed on The Weekend Aus­tralian’s questions to their chairmen, or say whether the chairmen had been made aware of the ­questions.

The issue is particularly serious given that the key responsi­bility of a chairman under corporations law is to ensure a company’s management acts honestly and legally.

The federal government has said its proposed changes to the SIS Act would reverse the 1993 carve-out of penalties for trustees of major funds, but the wording of the proposed changes suggests that even if the amendments are passed — they have been several years in gestation and the ALP is refusing to back them on the ground they are “limited and incomplete” — they may not apply to many trustees.

Rather than simply ensuring the penalties clearly stipulated in the SIS Act 1993 apply to all trustees, the changes state that trustees can face punishment only if they break the laws, and if those same laws are “contained or taken to be contained” in the governing rules of the super fund.

A spokesman for Financial Services Minister Kelly O’Dwyer said the proposed amendments did not create a new loophole.

Banks take wooden spoon as super’s underperformers

The Australian

20 July 2018

Anthony Klan

Superannuation funds run by the Big Four banks and other major ­financial institutions were among the worst performers of the nation’s biggest funds last financial year, while so-called industry funds took out every place in the top 10 returns table.

The latest data from SuperRatings, widely considered to be one of the nation’s best super ratings data sets, shows super funds run by CBA, ANZ, NAB, Westpac, AMP and IOOF were consistently among the worst performers over the past 15 years, the longest time frame for which the most complete data is available.

The SuperRatings data shows the major industry funds, those funds run by employer and union groups, were overwhelmingly the best performers, not just last year but over three, five, 10 and 15 years.

The data looks at the “balanced” options of the nation’s 50 biggest super funds by number of members.

 

SuperRatings releases only the top 20 performers on the list, saying it is its “long standing policy” to do so, however The Australian has obtained the full list of 50 from a separate source, revealing the underperformance of the “retail”, or for-profit, funds.

Like SuperRatings’ general ­announcement yesterday, the Productivity Commission’s recent 563-page report into superannuation also did not disclose the names of the worst performers in the super sector in its rankings.

The banks and financial institutions aggressively fight against the ranking of their funds by the best analyst groups because their funds, with more than five million member accounts, consistently underperform, largely due to bigger fees and charges they levy on super account balances.

The top three performers in 2017-18 were the balanced options of industry funds HOSTPLUS, AustSafe Super and AustralianSuper. Those three funds also ranked in the top four performers over five, seven and 15 year timeframes.

The eight worst performing ­investment options on the list of 50 obtained byThe Australian were the balanced options of funds managed by ANZ, CBA, Westpac and AMP.

The overall performance of funds run by the major banks and financial institutions was likely even worse than reported, however, because those funds report only less than half of their products to SuperRatings, with those unreported products far more ­likely to be their worst performers.

According to the Productivity Commission report, in 2015, 100 per cent of industry fund super ­assets could be accounted for by data provided to SuperRatings.

But only 44 per cent of the super assets of retail funds could be accounted for by data those funds had provided to the agency.

The Productivity Commission report found that the further back in time, the less likely retail super funds were to report their performance to ratings agencies.

Data provided to SuperRatings by the banks and financial institutions accounted for 47 per cent of all super assets they managed in 2015, but that figure fell to 33 per cent when looking at 2010 and 27 per cent for assets managed in 2005.

There is more than $150 billion held in so called “legacy” funds, which are funds managed by banks and financial institutions that people joined before 2013, ­before new laws were introduced.

 

The funds are “closed” to new investors but continue to fully ­operate, generally charging far higher fees than funds are able to charge in today’s market, because scrutiny has increased.

As revealed by The Australian this week, Australian Prudential Regulation Authority data — which captures all super investments because funds are ­required, by law, to provide it with audited data regarding the performance of all their underlying “investment options” — further shows the systemic underperformance of retail super funds.

The APRA data shows the biggest funds operated by each of the Big Four banks, IOOF and AMP delivered returns lower than even the risk-free “cash” rate over the past decade.

Those six funds delivered total average annual returns to members of 2.1 per cent to 3.1 per cent a year in the 10 years to June 30, 2017, roughly half the market rates for similar mixed investments.

Hostplus bets against pack wisdom in bid to threepeat

The Australian

19 July 2018

Cliona O’Dowd

Industry super fund Hostplus is taking a contrarian view on the market as it celebrates being named Australia’s best-performing super fund for the second year running.

The fund’s balanced option posted a 12.5 per cent return for the 2018 financial year, smashing the median return of 9.2 per cent across the industry, according to figures from superannuation consultancy Chant West.

“That’s an excellent result. It’s a record-equalling ninth consecutive positive year and well ahead of the funds’ own performance targets,” Chant West senior investment research manager Mano Mohankumar said.

“The better-performing funds in the year were those that had higher allocations to listed shares and to unlisted assets — property, infrastructure and private equity. A lower exposure to traditional bonds and cash also helped, given they were the worst-performing sectors.”

Even the year’s worst performers managed to hobble to the finish line with a respectable return of 6.5 per cent.

The median growth fund has now delivered a cumulative return of about 135 per cent since the 2009 low point and 72 per cent since the pre-GFC high in late 2007.

Hostplus chief investment officer Sam Sicilia said double-digit returns in its unlisted assets boosted the fund’s performance.

Its infrastructure and property portfolios each returned 12 per cent, while its private equity portfolio returned 15 per cent.

And while others are warning of more subdued returns in the years ahead, Mr Sicilia is more upbeat. He’s content to be an outlier in the market.

“If your view is the same as the market then you’ll get the market return. The market believes four things right now: that trade wars are inevitable and will be disastrous for markets; that interest rates are surely going up; that inflation sooner or later will go up; and that equity markets are overvalued and surely there’s going to be a correction. We take a contrarian view in all four of those,” Mr ­Sicilia said.

Sharemarkets would shrug off any trade war impact, he predicted, while interest rates in Australia were not going up any time soon, with the Reserve Bank “starting to waver on their outlook”.

Inflation, meanwhile, would remain low because of the deflationary impact of technology.

“Unless you can find a way to switch off technology you’re not going to find a way to generate inflation,” he said.

Hostplus’s equity exposure, sitting at 53 per cent, is made up of 25 per cent Australian shares, 20 per cent international shares and 8 per cent emerging market shares. The fund is looking at taking a little bit off the table in Australian shares — 1 per cent or 2 per cent at most — and moving it to international shares to gain more exposure to a broader range of industries.

It has a zero allocation to cash and a 2 per cent allocation to fixed interest that it would also soon move to zero, Mr Sicilia said.

The second-placed AustSafe MySuper Balanced fund, which recently announced it was merging with industry super fund Sunsuper, booked an 11.4 per cent return. Statewide Super placed third with an 11.3 per cent return, while AustralianSuper’s balanced option came fourth with an 11.1 per cent return. Cbus Growth rounded out the top five with an 11 per cent return.

Industry funds overwhelmingly dominated as the top performers, taking out every spot in the top 10 and returning an average 10.3 per cent last year compared with retail funds, which averaged 9.3 per cent. Industry funds have also outperformed over the long term, returning 8.1 per cent over the past 15 years compared with their retail peers, which returned 7.2 per cent.

“Over the longer term, industry funds have outperformed retail funds largely because of the way they allocated their investments and their preparedness to vary those allocations to suit changing market conditions,” Mr Mohankumar said.

“They tend to have higher allocations to unlisted assets such as private equity, unlisted property and unlisted infrastructure. This means they have less invested in traditional asset classes such as listed shares, REITs and bonds.”

Hostplus was the top-performing balanced fund in Australia over one, three, five, seven and 15 years, while UniSuper balanced was the best-performing fund over 10 years.

It’s simple: big fees lead to low returns, experts say

The Australian

19 July 2018

Anthony Klan

One of the world’s top experts on superannuation has called out claims from the major banks and financial services giants AMP and IOOF that it is “factually incorrect” or “misleading” to use the officially audited data, which they are legally required to file with the regulator, to judge their ­performance.

University of NSW Business School academic Kevin Liu, who earned his PhD investigating superannuation fund performance — and is a former internal researcher for banking and super watchdog the Australian Prudential Regulation Authority — said that the data was in fact the most accurate way to ­determine the performance of major funds.

“The theoretical argument is there can be many reasons for the underperformance of the retail funds … such as that analysis ‘doesn’t compare apples with apples’,” Dr Liu told The Australian.

“But we have created performance benchmarks … and this is not difficult and the methodology is not new. This systemic underperformance is not (due to) asset allocation. It’s not an investment manager’s skills. It’s fees and charges.”

Audited super-fund data provided to APRA by law shows that the biggest single-umbrella super funds operated by each of the CBA, Westpac, NAB, ANZ banks and AMP and IOOF performed vastly below market rates over the 10 years to June 30, 2017.

Those major funds have five million member accounts and hold $260 billion of the public’s money raised through the compulsory super scheme.

They have performed about half as well as the major so-called not-for-profit “industry” funds, and about half as well as super schemes that three of the major banks operate for their own staff members.

 

CBA’s Commonwealth Bank Group Super, which is open to CBA staff and their spouses, and which has 74,009 members with $11.06bn invested, delivered an average return of 5.4 per cent a year over the decade to June 30 2017.

By contrast, the biggest fund CBA sells to the public, the $72.1bn Colonial First Choice Superannuation Trust, which has 783,474 members, delivered ­overall average returns of just 2.9 per cent a year for the decade.

ANZ’s $36.2bn OnePath Masterfund, which is sold to the public via its vast network of financial advisers, and which had 949,486 members at June 30 last year, earned an overall return of 2.7 per cent a year over the decade.

However, the ANZ Staff Superannuation fund, which reported 31,688 members with retirement nest eggs worth $4.23bn, earned overall average returns of 4.7 per cent for the same period.

The major banks, AMP and IOOF have aggressively fought against this data being used to compare their performance and have provided a wide range of reasons why it is incorrect to do so.

However Dr Liu said not only were these claims incorrect, but that using this data provided “the most reasonable and accurate assessment performance” of a fund “because it reflects the overall ­efficiency of the firm as an independent operating entity”.

Further, APRA had long been aware this was the case: Dr Liu was the co-author of the peer-­reviewed APRA paper that proved it, and contained those exact words, in July 2010.

Dr Liu, then completing his PhD on the subject, had been employed as a researcher and his co-author, Dr Bruce Arnold, was at the time APRA’s head of policy, research and statistics.

APRA chairman Wayne Byres and deputy chairman Helen Rowell have repeatedly declined to comment when contacted about these issues by The Australian in recent weeks.

In a statement, an NAB spokeswoman said it was “inappropriate and misleading” to compare its performance using the legally audited APRA data.

The data shows that the super fund NAB operates for its own staff delivered vastly higher overall average returns over the past decade than a major fund it operated for the public.

“As we have previously stressed, to compare the performance of the MLC Superannuation Fund, which is a composite view of members’ individual investment choices, to the NAB Staff Super Fund, which is one investment option, is inappropriate and misleading,” the statement said.

The major umbrella funds, or “master trusts”, operated by the major banks, AMP and IOOF, typically have many underlying “funds”.

These funds in turn have hundreds of thousands of “investment options”, which invest in the actual assets, such as cash, shares, or government bonds.

Law turns blind eye to fund managers as SMSFs hit

The Australian

14 July 2018

Anthony Klan

The managers of $1.2 trillion of the nation’s retirement savings — the fourth biggest pool of pension money in the world — face no penalties under the law for any wrongdoing, facilitating gouging of the nest eggs of millions of Australians over the past 25 years.

The Weekend Australian can reveal the laws governing super trustees enacted in 1993 under then prime minister Paul Keating carry serious penalties for members of the public who operate self-managed super funds, but carve out those penalties in relation to corporate and “industry” funds that manage the life savings of about half of all Australians. The legislation states super “trustees”, the legally designated protectors of super, must legally exercise “care, skill and diligence” in overseeing those funds and to always act in the “best interests” of members, or face up to five years’ jail and “punitive” financial damages.

But while those wide-ranging laws apply penalties to members of the public who run self-managed super funds, they do not apply penalties to the trustees managing more than $1.2 trillion in super.

The loophole, evident via a reading of the Superannuation Industry (Supervision) Act, has been allowed to continue ­despite the federal government overhauling super laws in 2016, in a move it said would “enshrine the objective of legislation” into law.

Every federal government over the past 25 years has publicly boasted that the nation’s super system is secure and the envy of the world.

However, these investigations show that while there are many, descriptive and specific “criminal” and “civil” laws governing ­superannuation, the trustees of the bulk of the ­nation’s super cannot receive even a $10 fine for breaking the law.

But self-managed super fund trustees, who are in the vast ­majority of cases the owners of their super, can face up to five years’ jail, restitution of losses and even “punitive” costs for the wrongdoing.

Financial Services Minister Kelly O’Dwyer said the government had reforms before the Senate, introduced last September, but they had been “frustrated” and the law had not passed ­because of “lobbying against them by vested interests within the industry”.

“The Members Outcomes Package of reforms, currently ­before the Senate, includes a measure to extend the civil and criminal penalty rules in the Superannuation Industry (Supervision) Act 1993 to cover breaches by directors of their covenant ­duties,” a spokesman for Ms O’Dwyer said.

“From the time the Members Outcomes legislation receives royal assent, the court may make a civil penalty order against a ­director in breach of their trustee obligations and may issue them with a fine of up to 2000 penalty units.

“In addition, serious breaches of the directors’ duties (such as those involving intentional or fraudulent contraventions) will constitute a criminal offence punishable by up to five years’ imprisonment.”

A report in The Australian this week showed financial services giant IOOF, which manages $26 billion of the public’s super, has been accused by almost 100 of its own employees of fee gouging.

In a May 4 letter, almost 100 of the 150 financial advisers working for Bridges Financial Services, the biggest network of advisers ­responsible for funnelling the money into IOOF, accused the group’s management of “unfathomable” behaviour by attempting to increase the fees it charges its 350,000 member accounts.

In a letter to IOOF managing director Christopher Kelaher and IOOF chairman George Vernados, the group of financial planners said the gouging was “quite simply” a move to “increase revenue to IOOF”.

The group had told all investors, or their financial advisers, that it planned to introduce “exit” fees — making existing investors in super products less likely to leave those products, and raising more money for IOOF when they eventually did — and lift its fee for managing simple, risk-free, cash investments by 33 per cent, for no disclosed reason.

The Bridges planners said the moves by IOOF were particularly egregious given they occurred amid an active royal commission into financial services, which ­includes examining superannuation fund managers. Hearings into super will start on August 6.

Following the backlash by Bridges, IOOF told Bridges planners their clients would be exempt from several of the new fees.

Any person can become a government-certified financial adviser, with a “diploma of financial planning” requiring no exams and taking four days to complete.

People are not even required to have completed Year 10 of high school to complete that brief course, governed by the Australian Securities & Investments Commission, which consists of some multiple-choice questions and some “short-answer” questions, which can be completed online with no supervision.

The Australian revealed on Wednesday that the 340,000 member ­accounts in the IOOF Portfolio Service Superannuation umbrella, had earned an average annual return of just 2.1 per cent a year on their ­retirement savings in the 10 years to June 30, 2017.

The nationally recognised return on risk-free “cash” investments — based on the returns on simple short-term deposits paid by the nation’s big four banks and the amount the government pays in its guaranteed “bonds” it sells to investors — was 66 per cent higher over the past decade.

The returns on those 340,000 super member accounts was even less than the rate of inflation, meaning despite hundreds of thousands of investors paying between 9 per cent and 9.5 per cent of every pay packet in government mandated super, those nest eggs have actually lost money.

Both Mr Kelaher and Mr Vernados have repeatedly declined to comment when contacted by The Australian in recent days.

The most recent overhaul of superannuation laws passed the Senate in 2016.

“On 9 November 2016, the government introduced the Superannuation (Objective) Bill 2016, which will enshrine the ­objective of superannuation in legislation,” the government said at the time.

“It sets out a clear ­objective for superannuation: to provide ­income in retirement to substitute or supplement the Age Pension.”

The Coalition and major banks — and IOOF and AMP — fought against the royal commission into financial services.

Super funds ‘skimming over $700bn in fees’

The Australian

13 July 2018

Adam Creighton – Economics Editor

For two decades the superannuation industry has extracted more than $700 billion in fees above what typical super funds charge overseas, equivalent to almost 40 per cent of the nation’s annual GDP, ­according to new analysis.

Super funds charged fees more than four times higher than similar funds in Canada, Europe and the US, with workers thousands of dollars worse off each year, the study says.

“If members’ contributions between 1997 and 2016 had been invested in a passively managed fund with typical expenses and allocations, they would now be valued between $700bn and $800bn larger,” University of NSW economist Nicholas Morris said. The total pool of superannuation assets, $2.6 trillion in March, would now be more than $3.3 trillion.

Declaring superannuation a “policy failure”, Professor Morris, a joint founder of the highly regarded Institute of Fiscal Studies in London, said high fees meant the retirement system in Australia had delivered income replacement rates that were barely above 40 per cent, compared with an average of 63 per cent across OECD countries.

“Twenty-six years after compulsory superannuation began, you have a system that delivers an income replacement rate for retirees that is among the lowest in the OECD, forces fund members to bear risks they are ill-equipped to manage, and provides significantly poorer returns on investment than could reasonably have been expected,” Professor Morris told The Australian.

The Keating government made superannuation compulsory in 1992. The compulsory rate is scheduled to rise from 9.5 to 12 per cent by 2025.

 

Professor Morris’s analysis follows a recent Productivity Commission report that revealed system-wide annual fees had surpassed $30bn a year. The landmark report found one in three super accounts was unintentional, draining almost $3bn a year in fees, and millions of workers were set to retire with $600,000 less in savings because of chronic underperformance.

The study avoided inter­national comparisons, but Professor Morris’s analysis of 256 large super funds around the world — comparing actual performance against benchmarks based on underlying investment allocations from 2004 to 2012 — showed Canadian and US funds, on average about 10 times as big as Australian funds, performed far better than local options.

Domestically, “retail” fund fees were twice as high as non-profit “industry” fund fees. The best performing funds were closed, in-house corporate and public-sector funds, managed for staff, including those for the Commonwealth and Reserve banks, Goldman Sachs and Telstra. The worst-performing fund was the Australian Christian Superannuation Fund.

“The greater the degree of separation between managers and beneficiaries, the worse the performance seems to be, partly because less attention is given to how the members fare, partly because there are more layers of cost,” Professor Morris said.

Funds open to the public exhibited costs three times those of closed funds.

“There are multiple regulators with insufficient responsibility for controlling overcharging and other rent-seeking behaviour, with no-one taking responsibility for the efficiency of the industry as a whole,” he added.

The Turnbull government in May announced it would cap management fees at 3 per cent of members’ balances, and make life-insurance policies “opt-in” only for members under 25.

The analysis also showed international funds that used low-cost, passive investment strategies beat the relevant benchmark by 0.28 per cent a year, while those that managed funds “actively” ­underperformed by 2.92 per cent.

Australian funds are beefing up their teams of active fund managers. Sun Super, which oversees $55bn, is reportedly set to lift the number of investment manager bankers from 29 to 50 by 2021.

After six years studying the super industry, Professor Morris launched a book in April warning other countries against adopting systems of compulsory saving — Management and Regulation of Pension Schemes: Australia — A Cautionary Tale.

He said the poor Australian performance also arose from poor choice of assets, driven by tax rules; unnecessary “churn” of assets, generating fees; and erosion of legal requirements for directors to act in members’ best interests.

Why many retirees fear for the future

The Australian

June 25 2018

Robert Gottliebsen

For the last four weeks I have been holidaying in Scotland and Norway, where I encountered a lot of Australians who self fund their retirement.

Once the conversation moved from the latest scenic encounter, I discovered a combination of anger, frustration and a fear of the future—a deep emotion that I have never previously encountered on a widespread basis.

Accordingly, those businesses that rely on the spending of self-funded retirees need to understand that the game has changed.

But first, a thank you to those who congratulated me for receiving the Order of Australia in the Queen’s Birthday honours list. I was humbled.

In recent years spending by self-funded retirees has been strong and been a big contributor to tourism and the support of charities.

A great many retirees are now cutting back and some cruise operators in the up- market areas are reporting a 25 to 30 per cent fall in advance bookings and unheard-of cancellation rates, despite the consequent deposit losses.

Retailers in that sector will also notice the difference. Centrelink pensioners and those enjoying bonanza public service pensions are not affected. It’s those who sacrificed their living standards in past years to put money away for retirement that the politicians are targeting.

Among the self-funded retirees the most deep-seated anger is directed towards the Coalition, which retrospectively savaged retirement planning and broke all the previously established rules of government.

It’s not what the self-funded retirement community expected from the conservative forces in the government.

Having said that, they have adapted, which is why they are travelling overseas. Some are running down their retirement savings to greatly increase their dependence on the government pension. They hate doing it but we have a government that thinks little about the long-term implications of what it did.

Had the ALP said they would make no further changes, the retirement community might have supported them in droves.

Instead the ALP decided that if it was good enough for the Coalition to kick the sector it should join the party, so launched an all-out assault on self-managed fund funds in pension mode with assets roughly between around $400,000 and $800,000, reserving a special kick for retiring small entrepreneurs.

Shadow treasurer Chris Bowen believes there are big sums to be harvested but I don’t think he understands the retirement community and in my view he is simply wrong.

Indeed an angry retirement community is already carefully planning strategies to make sure the ALP does not harvest their franking entitlements.

People I spoke to will bring their children into their fund to take advantage of a planned loophole that has been set up to enable large superannuation funds, including industry funds, to use the taxable income of those fund members NOT in pension mode to offset the franking credits of those in pension mode. If an ALP government tries to block children being incorporated into self-managed funds it will endanger the planned industry fund strategies. Others hope to delegate their Australian equity management to the large funds. It might work.

Yet others will change their investment strategies.

These people are in their 60s and 70s and they planned their retirement decades ago in line with the rules of the day. The self-funded retirees will adapt but it’s much harder for the retiring entrepreneurs who used their accumulated tax-paid profits to fund their business.

When they sell the business, or just close it down, they aimed to pay out the accumulated profits in fully-franked dividends. As they have no other income, Bill Shorten and Bowen have them in a headlock.

And this could be a trigger for a much wider attack on pensioners.

And assuming the ALP wins the next election (and that is not a prediction but merely an assumption), in my view it will soon discover its sums are wrong. To cover the shortfall it may to attack the government pension community.

Perhaps illogically, in the eyes of the retirement community it’s not just the politicians who have them in the gun.

The Reserve Bank has lowered official interest rates to help young people, leaving the elderly relying on bank deposits for income to suffer. That pushed many into bank shares and their high dividends. Now we have a royal commission into the banks. The consequent fall in bank shares (plus Telstra) is another blow.

At the same time medical costs are rising faster than inflation.

It’s true the dwellings of self-funded retirees have increased in value, particularly in Sydney and Melbourne, but there is a shortage of apartments of a reasonable size so many are staying put rather than downsizing to release cash.

Meanwhile those rely on their parents for the education of grandchildren and other handouts are now feeling nervous because of the fear building up among their parents.

One day a group of politicians will decide that there are family votes to be gained. Although the Coalition is tarnished, a solemn promise of no more blows might help, given the ALP is thirsting for more retiree blood. Minor parties are winning votes in Europe. The same thing may happen here.

We name superannuation funds at the top of their game

The Australian

9 June 2018

James Kirby – Wealth Editor

The biggest idea in superannuation in a generation is the plan that everyone just has one fund for the rest of their life. Better still, that the single fund will be chosen from a “best in show” selection of funds that would be compiled by a new independent panel.

Will it ever come to pass? Already powerful forces in superannuation, such as the Financial Services Council, are lobbying against it. They say having a set of funds pinpointed as the very best would cause all sorts of problems. I guess so, especially for the funds that don’t make it to the top!

Being realistic, it might be a long wait for this “best in show” concept to get going. But, as someone once said, you can’t stop the power of a good idea.

There are a variety of lists of the top funds in Australia, but let’s go with a benchmark list as defined by the Australian Prudential Regulation Agency. To find, say, the top five publicly accessible funds is not that hard; you just have to ignore the “staff-only” funds, such as the Goldman Sachs Staff fund or the CBA Group super fund. And to be sure none of these funds have been just lucky over a short time­frame, let’s also focus on the 10-year figures that include how they performed during the GFC. Here’s the list:

UniSuper

One of the biggest and certainly one of the most influential funds, UniSuper is a $63 billion fund with a 10-year return of 5.8 per cent. Unlike the rest of the toppers on the APRA list (mostly industry funds) UniSuper is not strictly a “public offer fund”. It might be described as semipublic in that you can join if you work in higher education or you have a relative among its 421,000 members.

Care Super

This is a typical public offer industry fund that covers general workers in just about every industry. It is one of the smaller funds in the top league with $16bn under management (compared with $123bn at the King Kong of industry funds, AustralianSuper). A quiet achiever, Care Super has about quarter of a million members and a 10-year return of 5.5 per cent.

REST

With a 2 million membership base, REST is among the biggest funds. Such a major presence and $47bn in assets under management can restrict performance, but REST has impressed with an ability to still top the performance tables year after year — it has a 10-year average return of 5.5 per cent.

Cbus

With its constant advertising and previous public endorsement by a former RBA chief, Bernie Fraser, Cbus is perhaps the best known of the industry funds. As with any industry fund, there is union links, including with the CFMEU, which is a “sponsoring organisation”. The fund has $40bn under management and returned a 10-year average return to its 750,000 members of 5.4 per cent.

BUSSQ

This relatively small fund punches above its weight. It has emerged from the building industry but with just 85,000 members it could almost be described as a boutique operation. Nevertheless, it has been very successful in investing the $4bn or so under management with a 10-year average return of 5.2 per cent.

So there’s the top five — the best in show — according to APRA. The issue, of course, is what defines the best in show; those numbers will change in the future. The best funds of the past may not be the best funds of the ­future.

What’s more, some people will want more than raw numbers, they may want a fund that follows their principles closely — that might mean the fund is actively investing in renewables, or it might mean the fund should have no links to trade unions, it might just mean that the fund plays fair and by the rules. Retail funds from the big banks and insurers might tick the boxes on independent directors, but it’s not much consolation if they have higher fees and get beaten endlessly in terms of returns from industry fund rivals.

If you want to draw up your own list of “best in show” options for making the right choice in super I’d suggest picking from one of these choices.

Big funds: The APRA top five (UniSuper, Care Super, REST, Cbus and BUSSQ) along with perennial outperformers AustralianSuper, HostPlus and Sunsuper.

Big retail funds: If you insist on a fund that is not linked with ­unions then among the top retail funds (over 10 years, according to Superratings) you would have AMG Super-Corporate Super, smartMonday PRIME, Macquarie Super Options-Super Plan, Colonial First State (First Choice Wholesale Personal Super) and Mercer Super Trust — Corporate Superannuation Division)

Specialist funds — ethical and environmental: It’s your money and you may want to do more with it than hand it over to whoever tops the charts. Australian Ethical is the best known of the specialist funds group, while Future Super is also a key player. According to super ratings the top five sustainable balanced funds over 10 years are: Hesta’s Eco Pool, AustralianSuper’s Socially Aware option, VicSuper FutureSaver-Socially Conscious Option, Care Super-Sustainable Balanced UniSuper Accum (1) Sustainable Balanced.

Roboadvisers: ING Living super, SixPark, Stockspot, Ignition. If the remarkable success of passive investing in the wider funds management industry is anything to go by, then the biggest threat to the current power structure in super are the new digital operators designed from the ground up to keep fees low and to create funds that match the market. The roboadvisers are still too new to offer 10-year track records.

SMSFs: If you really want to run your own super then an SMSF is the best way possible to do it. There has been some negative publicity around SMSFs, but the SMSF system remains very attractive. The Productivity Commission suggests you need $1 million to succeed with an SMSF, but industry experts and active investors disagree with this estimate. A starting point of $200,000 is entirely feasible.

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