21 minute read
Why compulsion is vital to superannuation
While some Government backbenchers might argue for the removal of compulsion for young and low-income earners, plenty of evidence exists to prove that compulsion is a necessary component of a T MT: There is a suggestion being canvassed by some Government backbenchers that the superannuation guarantee should out within funds that we work with. And, Paul spoke about it, some of things that happen with early release. One of the small minority, had private superannuation taken out themselves and while our grandparents and great-grandparents successful retirement incomes regime. be made voluntary for young people and things that we think might be happening got by on the Age Pension I think today low income earners. What does the panel is that people are actually having converif you were to ask people whether they think of that? What’s your view Paul? sations about their super about; about were happy to live on the Age Pension in
PC: It’s up there with the Flat Earth whether it’s the right thing to take money retirement the answer would be ‘no’.
Society to be honest with you. If you want out of their super, about whether it’s the So we’ve come a long way and according people to save for their retirement then, right thing to keep their super in place to the Mercer Global Pension Index we’re in unfortunately, compulsion has historibecause of all the benefits that come the top three or four countries in the world. cally been proven the best way to do it. with it. And that is probably a positive. We can’t afford to take a step back. This
If you go to a 25 year old and say you We expect that we’ll see more voluntary system has helped a lot of people and in the can cash out your super of 9.5% so you cover taken out in super going forward than area of insurance I sit on the claims commitcan enjoy your life, then I guess that is ever before largely because of this heighttees of two or three funds and, like Paul and what they’re going to do. Nine-out-of-10 ened awareness and don’t forget that in Andrew, I’ve seen the benefits for people are going to say ‘thanks very much’. the middle of all these legislative intervenwho have made disability claims and been
Now there are a lot of smart, welltions there’s been a pandemic which also able to make ends meet, to be able to keep educated kids that will do the right thing heightens people’s sense of risk about their their house, to be able to do the basic things and their parents will probably drive them own health and their ability to earn income. that as Australians we all have a right to do. to do that, but there’s also a great many So, it’s complicated. The scenarios And that is because the superannuation out there that will take the opportunity to that have played out. But there are some fund has provided a good level of death and enjoy that money in their youth and, as I get positives that have come out of it. There is disability cover. older, I can hardly blame them sometimes. higher engagement. I think it would be such a retrograde step
But you know that that will create a RM: I strongly believe in our compulsory to take that away or to wind that back when I generational issue in years to come. You’ll system. think since the early 1980s we’ve achieved so have a sub-class of people who won’t When I entered this industry in the early much. have the same retirement incomes as 1980s about 25% of the workforce were others. Is that what we’re trying to do in covered by super. They were primarily
Australian society? I wouldn’t think so. those lucky enough to work in the public
MT: So Andrew, from an insurance point of sector for one of the big banks or some view, compulsion is one of the things that’s global multinationals and they had cover. helped drive insurance cover. If people have But for 75% of the workforce, they life insurance cover today, the majority didn’t and I suspect a minority, a very have probably got it as a result of superannuation. Is compulsion the key to that?
AH: Well there have been unintended consequences. There have been progressive pieces of legislation back to back that have actually taken some members out of the systems for good reasons. Good consumer reasons. The Protecting Your
Super legislation and PMIF legislation were designed for a certain purpose.
On the other hand, what we’re seeking as well is the engagement with members because of this legislation and because of the events that are going on in and around the industry and there are high levels of voluntary cover being taken
SMSF audit checklist in the age of COVID-19
BY NICHOLAS ALI
The COVID-19 pandemic has brought unique challenges to A An audit may seem a necessary evil, however, it’s an opportunity for an will also be subject to the disregarded small fund assets rule. self-managed superannuation funds and this checklist is an opportunity to assess the overall health of fund. overview of the status of self-managed superannuation funds (SMSFs) Thankfully this requirement will not apply from 1 July, – an assessment of the fund’s compliance as well as its overall health. 2021, as a change was mooted in the 2019 Federal Budget (it Look at the annual audit as a medical check-up of your fund, has yet to be passed into legislation, however). Assuming it which is worthwhile given the unique challenges COVID-19 brings. does become law, from 2021 onwards, a fund will not require Below is 14-point checklist to start an audit of an SMSF: an actuarial certificate if it is 100% in pension mode.
1. Check the trust deed
Check the trust deed to ensure it is properly executed, and to make sure the trusteeship and membership align. When a company is trustee, all members must be directors (the principle exception being singlemember funds). With individual trustees, all must be members of the fund (again, single-member funds being the main exception).
As a rule – if there has been a change of member or trustee circumstances throughout the year, this is impetus to review the fund’s trust deed.
2. Review the fund’s investment strategy
Check if the fund’s investment strategy is fit for purpose, given recent (and probably continuing) market volatility. Don’t just look at the fund’s strategic asset allocation (its long-term benchmark risk/return nexus). Consider the fund’s ability to take short-term positions away from the benchmark.
3. Check actuarial certificates and determine if your fund is subject to the disregarded small fund assets rule
The rules for this changed in the 2017/18 financial year. In short, the SMSF will not require an Actuarial Certificate if: 1) It has been 100% in pension mode for the entire financial year 2) The fund is not subject to the disregarded small fund assets rule. Disregarded small fund assets is where: • Any member of the SMSF has retirement-phase assets of at least $1.6 million; • The asset does not need to be in the SMSF; and • Measured as at 30 June the previous financial year.
So, if $1 million is in pension mode in your SMSF and you also have, say, $600,000 in an industry fund also paying you a pension as at 30 June, 2019, the SMSF will be subject to the disregarded small fund assets rule in the 2020 financial year.
It will require an actuarial certificate, even though the certificate will say the fund was 100% in pension mode (and thus not subject to tax on earnings). In a similar vein, if you started your SMSF pension with $1.5 million and it has now grown to $1.6 million, the fund
4. Make sure the assets are registered in the correct name
We are often asked: “What about a term deposit commencing when the fund had individual trustees? Now we’ve changed to a corporate trustee, the financial institution says the ownership of the term deposit will change if the investment is registered in the name of the new company, and accrued interest will be lost. What will the auditor think about this?”
In these situations, a declaration of trust may need to be signed by the trustee to satisfy the auditor, stating the term deposit is not registered in the name of the trustee.
5. Are assets recorded at market value?
It is very important assets are recorded at market value and it is up to the trustees to provide the valuation. Market valuations are important for several reasons, including: • Determining pension payments for the year; • Determining the level of in-house assets; • Payment of lump sums (member accounts need to be valued before a lump sum can be paid); and • Other scenarios, such as estate planning and retirement decisions. The Australian Taxation Office (ATO) has also published some very helpful guidelines on valuation of assets.
6. Limited recourse borrowing arrangements
An SMSF can borrow to invest in assets under strict conditions (usually for property). These arrangements are complex but suffice to say if you have a limited recourse borrowing arrangements (LRBA) in place, the property must be held in the name of the holding trust trustee, not the SMSF trustee. • For those SMSFs with LRBAs, the impacts of COVID-19 on rental incomes, contributions by members or other fund income may impact the SMSF’s ability to make loan repayments. • If a commercial lender has provided loan deferral, it is important this is documented to ensure the auditor understands why loan repayments are not being made. Where the lender is a related party, if loan deferrals are to be provided to the fund, such arrangements
must mirror commercial practices and be undertaken on an arm’s length basis. It is also important to ensure this information and the actual amendment to loan terms is documented and the documentation retained for audit and other purposes.
7. Make sure related party transactions are at arm’s length terms.
Acquisition prices of assets, such as transfers of property, must be at market value, otherwise non-arm’s length income (NALI) provisions may apply. These provisions ensure assets not acquired at market value will be subject to tax on income (and any future realised capital gains) at the top marginal tax rate, irrespective of whether the fund is in pension mode.
The ATO is also targeting non-arm’s length expenses; whereby a related party provides a service to their SMSF and does not charge the fund a commercial rate regarding the expense.
8. In-house assets to be no more than 5% of overall assets
An in-house asset, in general terms, is: • A loan to, or an investment in, a related party of the fund; • An investment in a related trust of the fund; or • An asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund. In-house assets cannot be more than 5% of the fund’s total assets and are measured on 30 June each year.
Ordinarily, the trustees would need to put in place a rectification plan to bring the in-house asset back to within the 5% limit by 30 June, 2021. COVID-19 may mean funds with in-house assets breach the limit, so the ATO has stated they may not take any compliance action if the rectification plan is not executed by 30 June, 2021.
The plan would still need to be in place, however, and this is something the auditor is going to want to see.
9. Check the contribution restrictions
The types of contributions an SMSF can accept are restricted by several factors: • The age and employment status of the member; • The amount of contributions, known as the contributions cap; and • The member’s total superannuation balance on 30 June of the previous financial year (affecting the member’s eligibility to non-concessional contributions, spouse contributions and government co-contributions).
10. Fund expenses cannot be of a personal nature
Expenses can only be paid by the fund where they relate to the running of the SMSF and the tax invoice is in the name of the SMSF. No expenses of a personal nature can be paid by the fund.
11. Assemble your benefit payments documentation
Make sure documentation relating to a benefit payment (lump sum or pension) is in place. Pensions must be paid in cash. Lump sums can, however, be paid in-specie. At this stage, if you have paid more than your reduced COVID-19 minimum, you cannot refund the excess back to your fund.
Trustees need to document a member’s decision to take the reduced pension minimum. The auditor will require this to see why the ordinary minimum was not drawn from the fund in the 2020 financial year.
The ATO and the auditor will not take compliance action where an SMSF landlord gives a related party tenant rent reduction in 2020 and 2021 financial years.
However, the rent relief must be due to the impact of COVID-19 and must be on arm’s length terms.
14. COVID-19 documentation requirements:
Early access to super
This is the $10,000 tax-free lump sum payable to fund members who have been adversely impacted by COVID19. It is a self-assessed lump sum, but make sure you are eligible for the payment, as the ATO will vigorously police this scheme and severe penalties apply to those who abuse it.
Documentation that shows a loss of employment, or a reduction in earnings, will be important for the auditor to verify accessibility to the scheme.
Nicholas Ali is executive manager – SMSF technical support at SuperConcepts.
Planning for your clients in retirement
BY AIDAN GEYSEN
It is important for advisers to understand and educate their clients on how they can best put their
Fself-managed super fund to good use in retirement. Fact: retiree clients play a substantial that when determining a draw down strategy An alternative method – role in self-managed superannuation for their SMSF retiree clients, a planner’s the total return approach fund (SMSF) planners’ practice, typically primary consideration typically starts coupled with a dynamic comprising over half of their total SMSF client with their client’s lifestyle, with 70% of spending strategy base, according to the annual Vanguard/ advisers reporting they review what their Investment Trends 2020 SMSF report. client needs to maintain their lifestyle. So how can advisers implement a retirement Also another fact – retirees are one of the Also taken into account widely is the income strategy that will support a most impacted groups in today’s low yield minimum compulsory rate the client client’s lifestyle but not create an overand high volatility investing environment. has to draw out due to SMSF rules – reliance on income such as dividends? With those two facts in mind, this report with 57% of planners factoring this in. This is where the total-return approach offers some interesting insights into this There were two drawdown methods – a strategy that looks at all sources of challenging task faced by today’s advisers, which the majority of advisers employ. The return from your portfolio, both income taking a deep dive into how SMSF planners most popular, employed by just over half of and capital – comes in handy. are working with retirees with self-managed advisers surveyed, was the bucket approach. This approach first assesses an funds and the most popular strategies This was described as splitting individual or household’s goals and risk employed to assist investors in this sector. assets into long term and short-term tolerance, and sets the asset allocation One of the key findings of the report buckets. Some 53% of advisers used at a level that can sustainably support the was that SMSF planners are seeing this method with retired clients. spending required to meet those goals. longevity risk and generating sufficient The ‘income from investments’ approach Unlike an income-oriented strategy income as their primary challenges was advised by 39% of advisers with retiree which generally utilises returns as when servicing their retiree clients – SMSF clients, described as using income income and preserves capital, the totalcorrelating with the challenging investment from their investments to cover withdrawals. return approach encourages the use environment they are operating in. This strategy suggests that, by only of capital returns when necessary. A vast majority (73%) of these spending the income that has been paid out, So, during periods where the advisers, felt there is a lack of suitable the underlying assets are not touched, which income yield of a portfolio falls below products in the Australian marketplace means that the strategy should last forever, an investor’s spending needs, the to assist with these issues. or at the very least, outlast your retirement. capital value of the portfolio can be So how are advisers preparing their However an income strategy, in particular spent to make up the shortfall. SMSF retirees for their drawdown years? in the current low yield investment As long as the total return drawn environment, can lead to an alteration of the from the portfolio doesn’t exceed the
Insights on drawdown risk profile of the investor’s portfolio, due to sustainable spending rate over the long the equity heavy exposure needed to yield term, this approach can smooth out One of the critical tasks for an adviser enough income to suit investor lifestyles. spending during the volatile periods with retiree clients, is advising on their In fact, Vanguard research suggests for markets which inevitably occur. draw down strategy, helping to ensure while back in 2013 an investor following This approach can also require the the money doesn’t run out too soon. the 4% spending rule could have used discipline to reinvest a portion of the
The average age of retirees in a diversified portfolio of 50% equities income yield during periods where the this research was 69, with average and 50% bonds to get that 4% yield. income generated by the portfolio is accumulated assets of $1.8 million, Today that investor would have higher than the sustainable spending rate and an average pre-tax drawdown had to shift their allocation to 100% – something that can require the valuable amount of $70,000 per annum. equities to get the same yield and guidance provided by an adviser.
It was no surprise the research reported so the risk has almost doubled. And while capital returns – best
represented by the price movement of shares – can be a volatile component of this strategy, taking a long-term view is paramount.
A total return approach separates the spending strategy from the portfolio strategy and can allow for better diversification of risk across countries, sectors and securities.
The other strategy that planners can employ alongside the total return approach for their clients, is addressing a client’s expenditure through the use of a strategy termed the ‘dynamic spending strategy’.
Vanguard combined the two most commonly used approaches to spending – the “dollar plus inflation” rule and the “percentage of portfolio” rule – to find a middle ground. The dynamic spending strategy resolves the portfolio viability risk aspect of the former and addresses the latter’s requirement to regularly adjust one’s rate of expenditure.
This strategy sets a maximum and a minimum percentage withdrawal limit for annual expenditure based on the performance of the markets and an investor’s unique goals. As a result, it allows for annual spending to adjust according to market performance while concurrently moderating fluctuations from year-to-year.
This means that those who are willing to be flexible in their spending – reducing expenditure in negative return years and spending more in positive return years – materially increases their chances of the portfolio lasting the period of their retirement in comparison to the dollar plus
inflation rule, and also lessen the large fluctuations in expenditure that would result from the percentage of portfolio rule.
Vanguard investigated the results that would come from capping spending increases at 5% of the prior year’s income each year – even if a portfolio grows faster than that, and setting the floor at 2.5% irrespective of the extent of a market correction.
The calculations are as follows:
Take for instance an investor who determined that a sustainable spending rate of 4% was appropriate and spent $40,000 from a $1 million portfolio in year one.
If in the following year, market returns were positive and the balance is now $1.1 million, a maximum of $42,000 would be spent (an increase of 5% on the prior year’s $40,000 withdrawal).
Without the 5% ceiling, $44,000 would have been drawn (4% of $1.1 million). In a poor year, they should cut spending to the floor of $39,000 ($40,000 less 2.5%) but no more.
Applying the ‘cap and floor’ approach to calculate each year’s of a client’s spending can reduce the variability in retirement income while balancing the likelihood that an investment portfolio can last the distance required.
Moving a client’s investment strategy to a total-return approach allows for the separation of an investment strategy from their spending strategy and enables a planner to help a retiree client better tailor their spending strategy to their retirement goals. This, alongside staying the course and taking the longer-term view instead of focusing on the current market volatility, can help ride out this health pandemic with more confidence.
Most retirees on track
Finally, the Vanguard/Investment Trends SMSF report showed that 70% of planners are confident their SMSF retiree clients will not require the Age Pension in the future, particularly those who are under 65 years old.
Of their clients still in accumulation phase, advisers felt that some 79% were on track to achieving their retirement goals.
Some 84% of advisers reported their retiree clients were drawing down in a sustainable manner.
Of the remaining 16% the most popular advice provided to these clients in order to correct this was to review their budget, expenses and spending habits, downside their home and explore the Age Pension entitlements, to return to paid employment and to use higher income generating investments.
Aidan Geysen is head of investment strategy at Vanguard Australia.
Fighting without fighting to see off tiresome Tim
Rollover believes that its just common knowledge that politics and ego are part and parcel of any merger process between superannuation funds.
And so whenever Rollover hears about a merger between funds he expects that messaging will reflect at least some ego and a good deal of politics.
And such proved to be the case with respect to the putative merger between NGS Super and Catholic Super with Catholic Super’s chief executive, Greg Cantor, appearing to have surprised his friends at NGS Super by the alacrity with which he Nobody has kept industry funds executives and their helpers busier than the chair of the House of Representatives Standing Committee on Economics, Tim Wilson.
That would be the same Tim Wilson with connections to the Institute of Public Affairs (IPA) and the same Tim Wilson who championed the Coalition’s campaign against the Federal Opposition’s franking credits policy, including controversially utilising a Parliamentary Committee of Inquiry, something which some have suggested helped Tim’s relative, Wilson Asset Management boss, Geoff Wilson.
So, anyone who visits the website of Wilson’s committee will note that he has been prodigious in using its Review of the Four Major Banks and Financial Institutions to place questions on notice interrogating industry superannuation funds about almost every facet of the operations, including any cross-overs which may have occurred.
So far as Rollover can tell, Wilson’s efforts have uncovered some interesting detail but nothing particularly juicy about the industry funds, but what has particularly taken Rollover’s eye is the manner in which IFM Investors has seen him off by adopting the old Bruce Lee kung fu tactic of “fighting without fighting”.
Apart from telling Wilson that many of his questions are outside the committee review’s terms of reference, it has answered most of his inquiries without telling
JUMPING THE GUN ON ANNOUNCING AN ENGAGEMENT
him anything he probably did not already know. decided to announce the merger to the always hungry media.
Rollover gathers that while the guys at NGS Super were a bit miffed, they were happy to go along with the early-than-anticipated announcement on the basis that such events are all part and parcel of superannuation fund marriages.
From where Rollover sits, the merger looks like one of the more sensible to be announced in recent times given that NGS Super covers those working in non-Government schools, while Catholic Super covers those working in the Catholic non-government schools system.
What can possibly go wrong?
ASFA, Annastasia, borders and vaccines
Rollover is offering a big shout out to Association of Superannuation Funds of Australia chief executive, Dr Martin Fahy, for his continued optimism with respect to his organisation’s national conference.
Anyone making inquiries about the conference will find that it is still scheduled to held from 3-5 February in Brisbane – something which is probably already giving rise to some raised eyebrows amongst those who might or might not attend the event.
The last time Rollover looked Queensland Premier, Annastasia Palaszczuk was still holding firm on keeping the border closed to almost anyone living south of the Tweed River and, so far as anyone can tell, there is not likely to be a COVID-19 vaccine available in Australia until perhaps the second half of 2021, if then.
So as Rollover has asked before, what do the people at ASFA know that others don’t know and why do they remain optimistic?
Rollover’s advice to ASFA is that they should do what everyone else has so far done, accept the inevitable and hold a virtual conference.
