$700bn SMSF boom eclipses other funds

The Australian, August 23, 2017

Investors continue to favour taking control of their own retirement savings by setting up a self-managed super fund, with savings ballooning to nearly $700 billion over the past year, delivering the sector more clout than industry or bank-backed retail funds.

The figures came as the total assets in the Australian super system eclipsed $2.3 trillion for the first time, increasing 10 per cent over the past year, according to the Australian Prudential Regulation Authority.

SMSF assets, which are regulated by the Australian Taxation Office rather than APRA, lifted by 9.7 per cent to over the year to the end of June.

The SMSF sector remains the favoured choice of investment vehicle for retirement savings, with nearly 30 per cent of all assets held in self-managed funds.

The SMSFs sector outweighs the $545bn currently managed by industry funds, and the $587bn in retail funds. Public sector funds have some $250.6bn in assets.

While SMSFs offer savers more control over their nest eggs and the potential to cut down on fees, SMSF owners forgo the benefit of APRA regulation and protections. After the Trio Capital group collapsed in 2009, when $200 million in super savings was found to have been funnelled into offshore entities, the federal government compensation plan did not include SMSFs.

The strong growth in SMSF assets comes as tensions between the warring regulated super sectors escalate, with the Productivity Commission looking to crack open the $500bn default system for super fund selection. The current default model currently favours the union-and-employee-backed industry fund sector. Most employees who don’t nominate a fund are shunted into one chosen through workplace deals.

The bank-owned retail fund sector is interested in injecting competition into the default system, in a bid to secure greater cash flows. Industry funds worry that any change to the system may leave savers worse off, as investment returns in the not-for-profit sector generally outperform the retail sector.

Industry funds on the whole outperformed all other regulated sectors last year, with a 10.6 per cent return. That compared with a 9.3 per cent annual return for corporate funds and 9.4 per cent in public sector funds. Retail funds lagged significantly, with a 7.8 per cent return.

APRA’s latest data showed growth in assets in the industry fund sector moved ahead of growth in the retail fund sector. Industry fund assets, managed on a not-for-profit basis, were up 17 per cent over the year through June, while assets in the for-profit retail fund sector rose 7.5 per cent.

Industry funds grew their share of $1.4 trillion worth of assets in the APRA-regulated nest eggs from 32 per cent to 34 per cent. The share of assets held in retail funds slipped from 39 per cent to 38 per cent.

There was a 26 per cent increase in the amount of assets in MySuper products. Super funds had to transfer member money out of high-fee legacy products into new low-fee no frills products by the end of last financial year.

A number of wealth management groups have warned the migration to a lower fee-generating system has been hurting the bottom line.

“It is well known that not-for-profit industry super funds outperform bank-owned super funds,” Industry Super Australia chief executive David Whiteley said. “Less known is the apparent widening performance gap between industry and bank-owned super funds over one, three and five years.”

ISA recently stoked the ire of the Taxation Office after it suggested the government’s new Single Touch Payroll technology, which is designed to streamline back-office business administration, could skirt default funds chosen through enterprise bargaining agreements.

The ATO issued a lengthy release “setting the record straight” about the optional nature of the super fund service within the new technology and said current safeguards with default super still applied.

After slumping 13.6 per cent lower during the 2016 financial year as savers battled the uncertainty of Treasurer Scott Morrison’s surprise super tax reforms, personal contributions into super jumped nearly 50 per cent over the year through June.

More than $30bn of extra money flowed into nest eggs, on top of the required 9.5 per cent mandatory employer guarantee payment.