SMSFs perform better than previously thought, suggests report

The Australian, November 6, 2018

A move to impose a minimum balance on self-managed super funds has been dealt a blow, with new research from the Productivity Commission revealing SMSFs may be cheaper, and perform better, than previously suggested.

A supplementary paper issued by the PC as part of its wider review of superannuation re-examines the sector to find that alternative measures of performance would “lift the measured returns” for funds under $500,000 by 1.2 percentage points and by up to 17 percentage points for funds under $50,000.

Importantly the PC has also allowed that individual funds can perform well with what are deemed as “smaller” balances of less than $500,000.

“In 2016, about 42 per cent (over 200,000) of SMSFs appear to be in this category (older than two years and balances less than $500 000),” the report says.

“That said, this need not imply that all SMSFs with balances under $500,000 are generating poor net investment returns. Averages conceal variation, and so some SMSFs within this group may well have lean costs and high net returns.”

The PC’s re-examination of the SMSFs included new framing of figures from both the Australian Taxation Office and Australian Prudential Regulation Authority, along with data supplied by Class Ltd, the SMSF software specialist.

Class refuted a draft PC report in April this year which said bigger funds were outperforming SMSFs. Class suggests SMSFs outperform bigger APRA-regulated funds.

Although the picture for SMSFs has improved in the re-examined set of statistics, for investors looking at starting a self-managed fund it is clear from both the original and supplementary PC report that less money in a fund means higher expenses, which will drag on net returns.

But there is little evidence yet that recent headwinds faced by SMSFs sparked any rush to close down SMSF funds.

As the report explains: “Wind-up rates are generally low, with approximately 1.9 per cent of SMSFs wound up in 2016 (ATO 2018), though rates are around 10 per cent for small SMSFs.”

The report also throws light on the wide range of investment performance that would naturally be expected from a wide range of individual funds.

The average amount used for starting up new funds has been $390,000 dollars – a figure which most likely may have served as a starting point for setting any new minimum level for SMSFs. (The Australian Securities and Investments Commission raised the idea of a minimum balance at a recent parliamentary committee.)

The report also shows that SMSF funds operators are getting younger.

The strongest category growth for people starting new funds has been in the 35 to 44 age bracket. This a pattern which has pulled the median age for trustees of new SMSFs down to 47.2 years of age, compared to 58 years of age for all SMSFs.

Competing with the idea of a minimum balance for SMSF commencents is the notion of an investor education test which would assess the ability of potential SMSF trustees to understand the basics of investment.

ASIC and other regulatory agencies have been reviewing the potential credentials of SMSF trustees in tandem with a review of qualifications for financial advisers.