Not so long ago, many in the super industry predicted that Australia’s love affair with SMSFs would fade (when there were about 400,000 SMSFs), and some commentators announced that the number of SMSFs operating had peaked due to our small population. Even this year, I have seen comments predicting the demise of SMSFs.
I don’t think SMSFs will fade anytime soon. Based on the latest statistics released by the ATO we now have close to 600,000 SMSFs run by more than 1.1 million members. The take-up of SMSFs has slowed slightly (no wonder with the ridiculous administration changes the federal government has introduced for Australians with higher account balances), but at least 5,000 new SMSFs are being established every quarter, and very few are being closed down.
Some within the financial services industry claim that the growing number of SMSFs is due to mis-selling by advisers and accountants. Others claim many SMSF trustees don’t know what they are doing and chasing the latest fad, risking their retirement savings. Another exuberant claim is that due to the size of this SMSF market, bad investing by SMSF trustees, and even over-allocation in Australian shares, will bring down the country’s economy (a view not shared by the Productivity Commission (see SuperGuide article What the Productivity Commission says about SMSFs).
Although these accusations are over-the-top, the current batch of SMSF trustees do control around a third of all super money in Australia, and own around 15 per cent of Australia’s share market. The weight of money and assets makes this group of 1.1 million or so Australians financially powerful, and also potentially lucrative for the financial services sector.
Note: While SMSF trustees may control one-third of all super assets, a mere 20 super funds control 45% of all super assets and 70% of all super money held in large super funds (see SuperGuide articles Kingpins of super: 20 largest super funds and Large super funds: How much do trustees get paid?).
Rather than unfairly blacken SMSF trustees as a group, perhaps the broader financial industry should examine what is going on within the SMSF sector, and why a small percentage of Australians (just over 4 per cent of the population), albeit with large super balances, have chosen an SMSF rather than remain with a large super fund.
While there may be a minority of SMSF trustees who may not be up to the job of SMSF trustee, and this may be due to isolated mis-selling by some advisers, the popularity of SMSFs has a lot more to do with what the large fund industry is NOT doing for Australians nearing retirement, rather than individuals simply wanting to own an SMSF per se.
As super balances grow, the cost-effectiveness of an SMSF becomes more compelling, but individuals in large funds generally don’t just move to an SMSF merely because they have a lot of super. The trigger for moving to an SMSF is usually for other reasons: a change in family circumstance, a change in job, or reaching a certain age and starting to think seriously about retirement and what that retirement will look like. In nearly all cases, a move to an SMSF is driven by a review of a person’s financial affairs.
Failure to meet retirement needs of fund members
The Productivity Commission has recommended that all large super funds actively guide fund members with their retirement planning, once they reach the age of 55, which obviously infers they are not doing a good enough job right now.
At SuperGuide, we have been saying this for many years, and the lack of plain English superannuation and retirement planning information and tools, was one of the main motivations for Robert Barnes and myself to set up SuperGuide nearly 10 years ago. In the past, the super industry had dropped the ball when it came to helping fund members plan for retirement, and some super funds are still slow to provide this service to fund members. Even government sites, such as MoneySmart, ATO and Centrelink, took years to produce information that was accessible to the regular Australia, although they have improved dramatically in recent years.
The transition from accumulation phase into retirement phase is generally where the large super fund sector loses fund members. For example, many television ads, and other forms of advertising created by large super funds seem to be focused on the accumulation phase, and very little information is available on pension options from large funds, including how a member can transition to retirement.
Perhaps if more super funds offered automatic pre-retirement guidance to older fund members, many Australians with large super balances who have moved to an SMSF, may have instead remained with their existing super funds.
As a commentator, I find it difficult to access current fee and investment performance information about commercial super pension products (see SuperGuide articles Super fees: Top 10 cheapest funds in Australia and Retirement performers! Top 30 pension funds over 5 years), so I can only guess how difficult the research process is for an Australian considering retirement.
Further, the limited choice in commercial pension options is rather damning for our very large super and financial industry, although the Productivity Commission found there was not a case for super funds to be forced to offer a retirement products (for information on super pensions, see SuperGuide articles Retirement: What types of superannuation pensions are available? and Deferred lifetime annuities: Why does the Government want you to use them?).
At a minimum, Australians considering retirement need information on expected account balances, cost of pension products, income security and flexibility, and impact on Age Pension entitlements (if any).
If large super funds can’t lift their game by helping members with retirement plans and offering improved pension options, then expect members with large account balances to seriously consider moving to SMSFs or SMSF-like products.
For more information…
For more information about the Productivity Commission’s report on super, see the following SuperGuide articles:
- Productivity Commission and super: 22 draft recommendations
- What the Productivity Commission says about SMSFs
- Productivity Commission identifies 41 major issues with superannuation system
Set out below are other SuperGuide articles referred to in this article.
- Kingpins of super: 20 largest super funds
- Large super funds: How much do trustees get paid?
- Super fees: Top 10 cheapest funds in Australia
- Retirement performers! Top 30 pension funds over 5 years
- Retirement: What types of superannuation pensions are available?
- Deferred lifetime annuities: Why does the Government want you to use them?