Cooper light: tastes good for SMSFs

The self-managed super fund (SMSF) sector is “in pretty good shape” according to Jeremy Cooper, chair of the Super System Review.

Speaking at a SMSF industry (SPAA) conference on 18 February 2010, Cooper stated that, on average, SMSFs have become cheaper to run as SMSF account balances have grown, while still maintaining “generally good compliance levels and with no signs of widespread failure.”

Cooper also said that SMSFs have been achieving average net investment returns that appear to be “at least as good as (if not better) than the returns in [other types of super funds]”.

Note that Cooper’s comments are merely preliminary observations – dare I say, “Cooper light”, rather than indicative of the contents of the final Super System Review report. Even so, anyone who takes seriously the task of running a SMSF should be heartened to read that Cooper believes that most SMSF trustees are doing well in taking on a “a higher level of responsibility for their retirement savings”.

According to Cooper, the aim of the Super System Review (see article What the heck is the Super System Review) in relation to SMSFs is to accept industry and consumer submissions to consider whether improvements can be made to the SMSF sector that can benefit members while not creating a greater regulatory burden. In other words, any recommendations relating to SMSFs will be designed to deliver more benefits than costs.

Cooper’s vision for SMSFs

Cooper spelt out his vision for SMSFs at the SPAA national conference, stating that a SMSF should be a leading superannuation vehicle that complies with the rules and is well-managed. A SMSF should also be able to innovate quickly and efficiently and not be subject to asset-based or percentage fee models when receiving SMSF services. He also believes that SMSFs are positioned to achieve net investment returns that are at least as good as the other types of super funds.

Cooper’s comments – a snapshot

SMSF advantages

• SMSFs can choose asset allocations that may not be possible within larger super funds, such as industry or retail funds.
• SMSFs can have longer-term investment horizons because they are not subject to ranking by rating companies.
• SMSFs can be run in a tax-efficient manner.
• The interests of SMSF members are aligned with the SMSF trustees making the decisions (same person).

Areas for improvement

• Reduce complexity – Cooper suggests SMSFs could be easier to establish and to administer.
• Ensure greater access to quality investment information for SMSF trustees.
• Average SMSF costs, and the time involved in running a SMSF should be publicly available to enable individuals to compare the costs against large super fund alternatives.
• Reduce SMSF operating costs by improving efficiency and using technology.
• Potentially review SMSF asset allocation because 20% of SMSFs invest in a single asset, while 60% of SMSFs invest only in cash and Australian shares. Cooper asks whether SMSF trustees are getting the best advice about asset allocation. (Note that Cooper doesn’t mention the link between large holding of Australian shares and the tax benefits of franked dividends).

Competency of trustees/service providers

• SMSF trustees are not expected to be experts in all facets of super, although the Review’s preliminary report indicated that some type of minimum education requirement might be necessary. Cooper has adjusted his view on this issue. He now believes the more pertinent issue is to improve the professionalism and competency of the service providers, such as accountants, auditors and advisers.
• Do the SMSF providers have enough scale to do their job properly? Cooper believes that there are a significant number of service providers who service only a handful of SMSFs. For example, in 2008, 50% of the 11,500 approved auditors audited fewer than 5 funds.

Minimum balance for SMSFs?

• SMSFs with fund balances of less than $200,000 cost more to run than a similar balance in a larger fund. This category makes up 25% of all SMSFs
• About half of the SMSFs with balances of less than $200,000 had 90% of assets in a single asset class, which is a concern, unless those SMSFs are in the latter stages of pension phase, where a fund may be running down assets as it pays out a pension. Cooper has asked the ATO to check the profile of these smaller SMSFs to determine if they fall into the pension  phase category.

You can read Jeremy Cooper’s full speech (7 pages) ‘A conversation about SMSFs’ on the Super System Review website or click here.

Related articles:

1. SMSFs: Nothing exotic or personal says Cooper review
2. Shining a Government spotlight on SMSFs: a summary
3. Cooper Review: Top 10 recommendations from final report
4. SMSFs: More money for Superannuation Complaints Tribunal
5. Are SMSF audits too expensive?