DEEP DIVE: EXPLORING THE STATUS OF SMSFS

Despite a consistent growth rate, and a pool of savings in the hundreds of millions, SMSFs are still regarded by some as niche, and by others as under threat from competing sectors, but do the numbers support that story? Taking a deep dive into the ATO’s latest statistics, Jason Spits investigates.

Australia’s superannuation system is generally regarded as one of the best retirement income savings models in the world and while the degree of SMSF sector growth was probably the last thing on the minds of the system’s creators, it has come to occupy a dominant place alongside retail, industry and public sector funds.

According to the ATO’s recently released SMSF statistical overview for 2017/18, the sector held $747.6 billion, or 26 per cent, of the total $2.87 trillion in the Australian superannuation system as at 30 June 2019.

This puts SMSFs ahead of the industry fund sector at $718.7 billion (25 per cent), the retail sector at $625.7 billion (21.8 per cent) and public sector funds at $510.6 billion (17.8 per cent), and represents a 40 per cent increase in asset size for self-managed funds since 30 June 2014. That growth, however, is tempered by the same ATO data, which shows retail and industry funds experienced a 29 per cent and 91 per cent increase in asset size over the past five years respectively.

Based on this growth, SMSFs are likely to be surpassed by industry funds within a few years. They also have fewer members than other parts of the superannuation industry, are believed to cost more to run and are limited in use to the average superannuant due to their complexity and administration obligations.

Based on these premises it could be argued, in comparison to the other superannuation channels, SMSFs are a niche idea that have reached their zenith, are an irrelevance to most people and the best days of this sector are behind it. But is that view borne out by the numbers?

Taking a deep dive

As the regulator for the SMSF sector, the ATO collates annual data via SMSF annual returns that have been lodged, and where lodgements are outstanding it uses ‘statistically valid formulas’ to estimate results.

It is interesting to note the ATO statistics only have one table, out of the 34 tables in the latest data, that makes any comparison to other parts of the superannuation sector. The simple reason for that is the ATO does not have oversight of the other parts of the superannuation system and it is not its task to make those comparisons.

What the ATO figures show is the SMSF sector has grown and matured in line with the demographic that first began to use them – the baby boomers – and will continue to serve their needs for many years while a second generation of trustees have already started their own SMSF journey.

The SMSF population

While SMSFs hold more than a quarter of all superannuation assets, there are only 1.1 million members spread across around 600,000 funds. It means when compared to retail and industry funds, SMSFs capture a small slice of the population and this proportion has remained relatively consistent, around the 1 million mark, over the past five years.

However, SMSFs tend to have a more uniform population over age 35, which is also the time when their usage expands among superannuants. Age range data from the ATO statistics shows that each of the 10-year age brackets that begin at 35 held about 11 per cent of total SMSF members as at June 2018. This number climbs slightly higher for those aged over 55, which is consistent with the number of baby boomers moving through the superannuation system, but is also the point where non-SMSF members are less represented in the superannuation population, according to the age range statistics available from the Australian Prudential Regulation Authority (APRA).

Age 35 also seems to be the time when people begin to engage with SMSFs, with the percentage of SMSF members in the 35 to 44 age band at the time of establishment jumping to about 30 per cent, compared to those aged 25 to 34 at the time of establishment sitting at around 11 per cent of all SMSF members over the past five years.

It also seems SMSF members are more likely to set up and retain their fund into retirement, which is an advantage they have over retail and industry funds, and which many have exploited. While ATO age range data indicates the average age of a fund member at the time of establishment for the past few years has been around 47, the average age for all SMSF members at June 2019 was close to 60. However, the SMSF sector has greater retention of members past that age on a percentage basis, with 49.5 per cent of all SMSF members aged 60 and above, compared to 15.2 per cent for all non-SMSF members as at 30 June 2018.

This ability for SMSFs to continue to provide accumulation and retirementphase options for members was recently flagged by retirement and superannuation consultancy Rice Warner as an advantage the SMSF sector has over the retail and industry fund sectors. Rice Warner notes SMSFs hold a high proportion of Australia’s retirement assets as they are structured to allow retirees to manage their own finances and have key advantages in how funds are structured, as well as how they handle tax and make investments.

“The key advantage of SMSFs is that they pool family superannuation – more than 85 per cent of these funds have been set up for couples,” Rice Warner says.

The firm points out that at retirement a couple with an SMSF could still use four linked accounts consisting of an accumulation and a pension account for each partner, with the former receiving contributions from any part-time work or to hold assets exceeding the transfer balance cap. “This contrasts to APRA funds where the partners are usually not in the same fund and where their accounts cannot be linked due to outdated administration platforms,” it says.

Setting a measure

Questions around the efficacy of SMSFs are often linked to balances per fund or member, returns to members and expenses in comparison to an APRA-regulated fund.

These areas were considered by the Productivity Commission in its December 2018 report on the efficiency and competitiveness of superannuation, which took the view SMSFs with balances below $500,000 usually had lower returns and higher expenses until the funds reached that level of assets.

There was some pushback to this view, with Class and the SMSF Association both pointing out costs and returns were not directly comparable between SMSFs and APRA-regulated funds, and the commission’s modelling overstated costs and understated returns.

The issue of running costs was raised again late last year in the Australian Securities and Investments Commission’s (ASIC) SMSF Fact Sheet, which stated average yearly running costs for the sector were $13,900 per fund. That figure was criticised as being excessively high by the SMSF Association, which noted the average running cost was closer to $5000, now confirmed by the most recent ATO data.

According to those figures, the average operating expenses for an SMSF were $6152 for the 2018 financial year and the median operating expenses for the same period were $3923. Interestingly, over the five years covered by the ATO data, the average and median costs have not risen sharply, with average costs in the 2014 financial year being $5301 and median costs at $3514.

Commenting on the ATO data, SMSF Association chief executive John Maroney said: “Previous analysis relied on the use of averages that ignored the significant distortions caused by large SMSFs and funds choosing to use borrowings and buy extensive administrative, insurance and investment services.

“What these revised tables clearly show is how SMSFs exceeding $2 million had a significant impact on the weighting of the costs allocated to an average figure. In addition, the impact of expenses such as investment expenses, insurance and interest on investment borrowings were attributed to the average when many SMSFs choose not to use these services.”

And what of the issue of SMSFs needing to hold at least $500,000 to reduce the impact of costs to the fund? Perhaps a better question would have been what are the costs per member, which was raised by administration provider SuperConcepts at the time of the release of the Productivity Commission’s report.

SuperConcepts noted the report did not differentiate between fund balances and member balances, which should halve the optimal balance figures required as most SMSFs have at least two members. An examination of the ATO statistics shows the number of funds being set up with an asset balance higher than the $200,000 threshold has been increasing over the past five years and now represents more than 60 per cent of SMSFs being established compared to just over 50 per cent five years ago.

At the same time, the level of average assets per member, and per fund, at time of establishment has continued to climb as has the overall average assets per member, and per fund, at the close of each financial year according to the ATO data. This increase in average assets has been evident over the past five years (ie: 2013/14 to 2017/18), putting SMSFs well within the range described by the Productivity Commission.

Worth the effort

Given the work that goes into running and maintaining an SMSF, is it worth it? It is a question ASIC poses on its Moneysmart website, stating “while having control over your own super can be appealing, it’s a lot of work and comes with risk” and then adding “generally, SMSFs don’t perform as well as professionally managed funds”.

And ASIC is correct. ATO data shows that while generally comparable to APRA regulated funds, SMSFs are typically slightly behind even when a five-year average is considered where SMSFs returned 7.3 per cent compared to an average APRA fund return of 8.22 per cent.

This return profile was flagged by the Productivity Commission, which notes: “The SMSF segment has delivered broadly comparable investment performance to the APRA-regulated segment, but many smaller SMSFs (those with balances under $500,000) have delivered materially lower returns on average than larger SMSFs.”

Later in the report, the commission also makes this observation: “This does not mean that all members in smaller SMSFs will be receiving poor returns.

“Some may be earning high net returns, or have tax advantages that are not fully reflected in the net returns data. Some may also have been set up as part of broader strategies to manage members’ financial risks, with regard to their assets outside of superannuation.”

It is this statement that lies at the heart of what an SMSF is about and which is often lost when making pound-for-pound comparisons between SMSFs and other types of super funds. Those comparisons only work if all superannuation funds are viewed as being equal and delivering the same outcomes for every member.

That expectation is realistic when comparing a balanced fund with the exact same investments offered by a retail or industry fund, but it falls down completely when making comparisons with SMSFs, mainly because the latter don’t invest in the same way as the former and the outcomes are usually different as well.

This is best seen in the asset allocations statistics for SMSFs collected by the ATO, which show that, on the whole, SMSF members invest in the same asset classes as other super fund members, but do so in different ways. Listed Australian shares is the highest ranking asset making up 29.1 per cent of total SMSF assets, followed by cash and term deposits at 21.6 per cent, and then property investments at 19.9 per cent, which is broken into non-residential real property (9.1 per cent), residential real property (4.9 per cent) and limited recourse borrowing arrangements – into both non-residential and residential real property (5.9 per cent), as at 30 June 2018.

A comparison with similar data released by APRA for the March quarter 2018 shows the average allocation to Australian shares by an APRA-regulated fund was 23 per cent, cash was 10 per cent and listed and unlisted property was 8 per cent. A significant difference was the allocation to overseas shares at 24 per cent compared to only 1.8 per cent for all overseas investments, including shares, property and managed investments, by SMSFs.

It is these differences that are the point of SMSFs and which have attracted people to them, allowing them to decide for themselves what their exposure will be to any asset class but also using the legally available structures to access other investments outside the mainstream.

Loose cannons

This ability has attracted some criticism over the years and has also come with a number of warnings. Prior to it being taken offline, due to the release of more accurate data, ASIC’s SMSF Fact Sheet stated “the buck stops with you” when owning and running an SMSF. It is a message that has been frequently promoted by the ATO as it encourages trustees to know their obligations.

Former ATO SMSF segment assistant commissioner Dana Fleming is on the record several times stating the ATO wants to see a greater level of compliance from trustees, but also noted the relatively low level of problems associated with the sector. Speaking at the SMSF Association National Conference in February, Fleming said there were 10,330 SMSFs with 27,719 regulatory contraventions in 2019.

“The most common contraventions remain, and have been over five years, loans to members (21.1 per cent), in-house asset breaches (18.5 per cent) and separation of assets (12.7 per cent) where there has not been clear record-keeping to keep the SMSF assets separate from the personal assets of members,” she said, reflecting the numbers in the ATO statistics report.

“I do want to remind everybody that this is just 2 per cent of the population and that has been a steady number for many years. We are talking about a very small proportion of the population.”

So, far from being loose cannons, or a niche-play by superannuation dabblers, SMSFs have created a well-regulated and compliant alternative likely to retain its place in the retirement income landscape. In light of the issues raised by the Hayne royal commission around the treatment of superannuants in APRA-regulated funds, SMSFs have stood out in comparison, a point which has been noted in Canberra as well.

“One of the reasons I like SMSFs is they are a good way of taking control of your own destiny, which is a healthy thing as there has been too much principal agency cost in the super system,” New South Wales Liberal Senator Andrew Bragg said recently.

“The SMSFs have done well and not had any major reputational issues and all the reviews of those schemes appear to given them a clean bill of health. It is very hard to find major systemic problems there because people are, effectively, running their own race.”

Note: This article contains data tables which can be viewed in the full text version available here: https://issuu.com/bmarkmedia/docs/sms-qiii-2020-issuu/14.