Leading the way

The SMSF sector is an industry leader across multiple aspects of the retirement savings system. SMSF Association chief executive Peter Burgess highlights a few areas where the sector is forging the necessary pathway.

It’s rarely acknowledged in the wider superannuation industry, but the SMSF sector often sets the pace of reform. Nowhere has this been more apparent than in narrowing the gender gap that has seen women retire on much lower balances than men or in utilising retirement income streams.

Significantly lower balances for women is an issue that has plagued the industry. As the Senate Economics Committee found when it handed down its report in 2016, aptly titled “A husband is not a retirement plan”, many women face an insecure retirement. Men’s superannuation balances at retirement are, on average, twice as large as women’s. In practice, this means women, particularly single women, are at greater risk of experiencing poverty, housing stress and homelessness in retirement.

Although it was a damming indictment on the system, in the SMSF sector, at least, things are improving. The Class “2023 Annual Benchmark Report” shows that although men still have higher average balances than females, the gap is narrowing, from $149,905 in the 2022 financial year to $140,446 in 2023. At 30 June 2023, female balances were 84.9 per cent of male balances, with the gap closing nearly 1 per cent over the previous year.

The contrast with the Australian Prudential Regulation Authority (APRA)-regulated funds could not be starker, with figures showing women in this superannuation sector retire, on average, with 23 per cent less super than men. Although there are myriad suggestions to narrow this gap, such as superannuation benefits for paid parental leave and a super baby bonus, the fact remains women still seriously lag men.

For the APRA funds, this situation was compounded by the federal government’s decision to allow the COVID-19 early release payment scheme, which had the effect of widening the super gender gap in these funds. Between 2017 and 2022, APRA funds recorded a 1.5 per cent increase in the gap, while SMSFs went the other way, reducing the gap by 4.4 per cent, according to the Class report. However, the gender gap between SMSFs and APRA funds does narrow as the retirement age of 65 approaches, but quickly widens after APRA fund members turn 65 and there are no restrictions on accessing super.

There can be no doubt recent legislative changes have played a role in reducing the gender gap, particularly for members with balances exceeding the general transfer balance cap (TBC) , currently $1.9 million. Those members will continue to adopt contribution splitting and recontribution strategies to rebalance their accounts to stay within the TBC. Removing the $450 super guarantee threshold was another positive, especially for members in public offer funds.

But the SMSF Association would strongly contend this positive trend to rebalance the gender inequality in superannuation that is happening in the SMSF sector is about far more than just regulatory or even societal change. Although we have always maintained SMSFs are not for everyone, for those that opt for this retirement savings vehicle there are two compelling factors – investment choice and control.

Wanting control means being actively involved in running your superannuation fund, often with specialist advice. It means there is a growing number of women who are prepared to give the necessary time, often not easy, especially for those in the accumulation phase still having full-time work and raising young families. Yet as the ATO statistics show, an increasing number of millennials and gen Xers are opting for this retirement vehicle. Consequently, we are now seeing a higher level of non-concessional contributions from women compared with men, while on the concessional contribution front, women’s contributions are closing in on those of their male counterparts.

None of this is to suggest the superannuation cards are still not stacked against women. They still have the career gaps, do more part-time work and have lower wages. In addition, they are typically the primary childcarers and, increasingly with an ageing population, more likely to be responsible for aged care. But for women who opt for an SMSF, and are prepared to take the responsibility this entails, the evidence suggests they are in a better position to enjoy a secure retirement.

It’s not just gender inequality where SMSFs are leading from the front. We would contend our sector is ahead of the curve when it comes to using superannuation to provide a retirement income. Certainly, we do know the regulator, APRA, is less than impressed with how the public offer funds are addressing this issue.

In a review recently handed down, it found that although trustees are improving their offerings of assistance to members in retirement, there is variability in the quality of approach taken and a lack of urgency in embracing the intent of the covenant regarding retirement incomes. APRA deputy chair Margaret Cole put it succinctly when she said: “A further 3 million members will become eligible to draw from their super in the next 10 years. They are entitled to rely upon their super fund for assistance as they plan for a sound financial future. Some trustees have made a good start, but overall there has been a lack of progress and insufficient urgency.”

It’s a comment borne out by the numbers. At June 2022, there were 2.8 million members aged 65 and over with accounts in APRA funds, but only half were in full or partial pension phase – despite the obvious tax benefits. By contrast, the Class report shows nearly 90 per cent of SMSF members aged 65 and over had a tax-free retirementphase account, with only about one in eight in this age bracket remaining solely in accumulation. Quite clearly most SMSF members entitled to do so are drawing a retirement income from their superannuation. As the report said: “It is clear APRA funds have a long way to go to bridge the gap to assist members with utilising their superannuation in retirement.”

Which simply begs the questions: why this gap? In the association’s opinion, it’s largely a consequence of SMSF members being more engaged with their superannuation. In many instances they get specialist advice from financial advisers or accountants over the course of their super journey, from establishing the fund, through the accumulation phase and finally into retirement. Although this is often associated with their investment strategy, it covers all aspects of managing an SMSF.

Remember too, those who opt for an SMSF have a legal obligation to consider member objectives and cash-flow requirements as part of their investment strategy and to plan for the fund’s ability to pay benefits when members retire. These are obligations the regulator strictly enforces, ensuring SMSF trustees have a strong focus on their retirement income strategies.

It’s a justifiable comment that with about half of SMSFs in retirement phase, it’s understandable they have a greater focus on retirement compared with the APRA funds where most members are in the accumulation phase. But that observation is becoming far less pertinent with the compulsory superannuation system now in its fourth decade and, as Cole correctly pointed out, 3 million more APRA fund members will be able to draw down on their superannuation in the next decade – many with considerable balances. These funds must have a greater focus on retirement. Perhaps a starting point is taking a closer look at how SMSFs handle it.