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.