Superannuation funds move to confront the challenge from SMSFs

Self-managed superannuation funds remain the fastest-growing sector of the super industry, and as Damon Taylor reports, the major funds are adjusting their own offerings accordingly.

From cottage sector to funds under management force, self-managed super funds (SMSFs) have had an impressive rise.

Growth long expected to plateau has been maintained on the back of specialised service providers and institutional focus – and yet the sector’s influence goes beyond that.

Indeed, for Fiona Reynolds, chief executive officer of the Australian Institute of Superannuation Trustees (AIST), the tailored approach to superannuation that SMSFs offer is one being sought by all superannuants, and so the wider super industry must evolve as a consequence.

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“When I talk to people who are in self-managed super funds, I say to them, ‘why are you in a self-managed super fund?’” she said.

“And when I get to the bottom of it, it’s not about them wanting control – they don’t want to control their own money in most cases – but what they do want is individual solutions.

“So they want to know that what’s happening for their retirement is taking into consideration their needs,” Reynolds continued.

“And that is more difficult, I think, in a pooled situation.

“Clearly, not-for-profits and retail funds do need to do more to have tailored solutions for people.”

Identifying a similar evolution within the super industry, Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), said that the entire superannuation landscape was changing.

“When you look at the types of platforms that are being developed now across the retail and industry fund space, and the flexibility that they’re providing members without them having to take on the responsibility of trustees, I think its quite remarkable,” she said.

“The landscape is changing very quickly and it’s largely because funds are listening to their customers, listening to their advisers.

“The industry is starting to understand that they can actually provide people who want to manage their own assets with access to wholesale-type investments,” Vamos continued.

“Now, SMSFs may have provided the initial impetus for that, but I think it would have happened anyway because that’s the way the whole of services is starting to go and it’s the nature of the way society is going.

“So I think when you look at the global financial crisis and you look at the way society views big providers, there’s been a move for people to take more control.”

Yet whether or not recent changes within industry and retail funds have been aimed at bridging the gap between pooled superannuation arrangements and self-managed funds, Andrea Slattery, chief executive officer of the SMSF Professionals’ Association of Australia (SPAA), said that SMSFs remained a breed apart.

“SMSFs are quite different – in the first instance because they have a different clientele, but they are also a fundamentally different opportunity as well,” she said.

“There is much more than investment flexibility involved here because the reality is that the retail sector has been offering significant investment flexibility for a long time now.

“What I actually see is the industry funds opening up opportunities that are making them more and more like the retail sector,” Slattery continued. “And they’re competing on that basis. But they are still a far cry from being SMSF-like.

“So it’s not that the APRA-regulated (Australian Prudential Regulation Authority) funds are closing the gaps between the industry’s various sectors – they’re only really closing the gap within the APRA-regulated fund sector.”

Of course, if recent acquisitions within the SMSF space are any indication, the change being experienced within the ‘do-it-yourself’ sector of superannuation is no less significant. 

To many, it seems a line is being drawn in the sand, with the large institutional approach on one side and the more traditional boutique approach to SMSFs on the other. 

However, for Slattery, service provider backing, or lack thereof, is irrelevant.

“What’s actually happening in Australia at the moment is that a lot of people are seeing the opportunities of future value that they can add to their SMSF clients,” she said.

“So we need to be very careful about two things here: those who are competent advisers need to be able to get into this business and need to be able to add value to their clients, whether or not they’re retail or wholesale, whether they’re accountants or financial planners, or whether they’re lawyers or auditors.

“So whoever they are, they need to become competent, they need to become SMSF specialists – and there is only one and that’s the SPAA SMSF specialist,” Slattery added.

“But if they’re not competent, there are a lot of people that want to come into this world and get an easy win.

“So we would encourage people to become competent, to add value, to build the integrity of the industry so that it can grow – that’s one side of the coin.”

The other, according to Slattery, is efficiency.

“No matter who you ask, recent years have seen a seriously big increase in efficiency in the SMSF world,” she said.

“The SMSF world has been able to, according to the ATO stats, bring average fees down to 0.6 per cent and to do that, efficiency gains across fund administration and operation have been extraordinary.

“But that opportunity has come via both the small and the large and the in-between,” Slattery continued.

“So what we’re seeing is efficient niche market services that are being produced both at the lower levels and at the upper level; they’re services that are allowing people to broaden what they’re delivering and to provide those services at a more engaged level.

“And where they are able to actually become competent at the same time, they are genuinely adding value and the consumer is undoubtedly better off.”

Similarly, Vamos said that in self-managed super funds, in industry funds and in retail master trusts, the source of the service, whether institutional or boutique, is not nearly as relevant as its quality.

“What we’re seeing is the transformation of the industry to servicing individual members,” she said.

“This is the transformational change where even superannuation funds are saying, ‘how do I, even in a default environment, deliver to the individual’s hopes and dreams in terms of retirement outcomes?’

“So we’re seeing a huge change in the industry, in that what self-managed funds have done is provide a real catalyst for innovation,” Vamos continued.

“When I look at the innovation that has happened around self-managed funds, both in terms of administration platforms and in terms of the ways they’re investing their assets, I think we’re seeing an enormous transformation.

“They’ve driven enormous innovation and I think that’s where we can learn a lot – we can learn a lot from the way self-managed funds are managed and the way self-managed funds invest.”

Yet despite the innovation and impetus that has arguably been provided by SMSFs, there continue to be perennial debates around both compliance and appropriateness.

Indeed, Slattery’s concern about SMSF service providers coming into the sector for an ‘easy win’ is one shared by Reynolds. 

Yet where Slattery’s concerns are over service provider competence, Reynolds’ concern is the trustees themselves.

“Unfortunately, I think a lot of people use SMSFs for tax evasion, rather than retirement solutions,” she said. “And I think that needs to be looked at and looked at carefully.

“I think a lot of other people with smaller balances do it because they’re told this is how you can get into property, to get around the fact that you can’t borrow in the same way in a pooled fund,” Reynolds continued.

“So I think that attracts people, particularly Australians, because we’re obsessed with property and being property owners and we don’t realise that property markets go up and down like the share market.

“All we see is the bricks and mortar, but if we looked at how much our homes were worth at different stages and realised that they go up and down depending on property value in the same way as the stock market, it might be an altogether different story.”

According to Reynolds, though there is undoubtedly a place in the industry for SMSFs, they have also been well assisted by the current regulatory environment.

“I think that self-managed super funds have become a creature of the times and the environment,” she said. “And if the regulatory environment changed, I’m not sure that people would stay in them in the same way.

“That said, I do think there is a role for them to play for some people – I’m not anti-SMSF,” Reynolds added.

“There’s a role for SMSFs, particularly for your smaller business owner and things like that.

“I just think there’s too many of the wrong people in SMSFs and I also see far too many people who aren’t using SMSFs for retirement savings but for tax avoidance.”

Of course, the issue attracting the vast majority of attention for SMSFs in recent months has gone well beyond compliance and appropriateness. 

Instead, the spotlight has been drawn by the collapse of organisations such as Trio Capital, consequent compensation levies and where SMSFs are ultimately placed with respect to fraud.

But for Vamos, the situation simply reinforces the differences between SMSFs and APRA-regulated funds.

“I think at the minimum people need to understand that the way self-managed funds are regulated, because you’re doing it yourself – it’s very different to the pooled area,” she said.

“And therefore some of the protections are not available.

“You need to understand that when you’re going into a self-managed fund, there is a risk, an increased risk, particularly if you put all your eggs in one basket,” Vamos added.

“And clearly, Trio is a good example of that.”

Alternatively, Slattery said that the Trio compensation levy had not highlighted differences in regulation so much as the limitations on recourse for all superannuants.

“At the moment, there is simply no compensation scheme for anybody that is a guaranteed compensation scheme in super,” she said.

“What there is is a range of options that are available to SMSFs and APRA-regulated funds.

“So you can go to the AAT (Administrative Appeals Tribunal), you can go to the Supreme, Federal and District Courts, you can got to the SCT (Superannuation Complaints Tribunal), you can be legally represented and finally, everybody has access to compensation through PI (professional indemnity) insurance, either through the product itself or through the adviser,” Slattery outlined.

“The only difference between the two sectors is that in industry and retail funds, there’s what we call a Part 23 compensation arrangement.”

Describing Part 23 of the Superannuation Industry Supervision (SIS) Act in greater detail, Slattery said that where a fraud claim was made by a fund on behalf of a member, it had to be deemed ‘in the public interest’ for it to be approved.

“The public interest test is then approved by the Minister, who has the discretion across the top of that, and the only two major discretions that have ever been given by the Minister for these large cases have both involved large public interest matters,” she said.

“And under Part 23a, there’s no guarantee that the claim, even if it’s gone through those two real tests, will be paid at 100 per cent.

“So Part 23 has a lot of holes in it,” Slattery continued.

“Everybody says that if you’re in an APRA-regulated fund, you will be compensated and you will be compensated to 100 per cent, but that’s the anecdotal information that is not correct.

“In the Trio matter, only four funds have been approved; they were corporate funds and Government funds and in the majority of those funds, they had Government employees in them – but there were still a significant number of funds who weren’t approved.”

However, the major point of contention regarding the events following Trio’s collapse is whether SMSFs should have been required to pay a portion of the compensation levy raised.

And for Reynolds, the matter comes down quite simply to how well SMSF members expect to be protected.

“At the end of the day, SMSFs can’t have their cake and eat it too,” she said.

“If they don’t want to pay a levy to APRA to insure themselves against collapses, and they certainly complained about that when it was suggested, then they can’t expect to be covered against collapses.

“You can’t have it both ways,” Reynolds added. 

According to Reynolds, a compensation scheme to be levied in the event of fraud and loss could be equated to any other form of insurance.

“Quite frankly, with the APRA levy from Trio, not all the super funds were involved in Trio and yet we still had to contribute,” she said.

“And that’s why members in APRA-regulated funds got some money back.

“But if SMSFs aren’t going to pay into some similar scheme then they can’t expect to get their money back,” Reynolds reiterated.

“And frankly, I can’t think why you wouldn’t pay a levy to be covered.

“It’s like taking out an insurance scheme; why wouldn’t you have some insurance against what is arguably your biggest asset?”

Yet on the topic of ‘fairness’ with respect to compensation levies, Slattery was quick to point out that all fund members, whether SMSF, industry funds or retail master trust, had reason to take issue with a levy raised on the back of others’ mistakes.

“What you’ve got here is innocent members of the APRA-regulated sector, innocent members of SMSFs and innocent individual investors out there in the market,” she said.

“But from the SMSF perspective, if you were a trustee and it was you and your wife in the fund, would you be willing to pay, say, $1,000 out of your hard-earned to make sure that somebody like me and my husband, who haven’t made the right decisions, can now be recompensed?

“So why would we want to have a levy imposed when we’ve done nothing wrong in your fund?” asked Slattery rhetorically.

“And, to be perfectly honest, why do all the other members of the APRA-regulated sector have to fund other people’s mistakes?

“Why shouldn’t it actually be caught at the trustee level of that fund, or at the asset allocator who’s provided the guidance, or at the research house or at the product development area or at the advice level? If there’s to be compensation at all, that’s where it should be.”

The bottom line, according to Slattery, is that the members of SMSFs have other avenues to pursue when it comes to recouping losses resulting from fraud.

“If you’re going to go into an SMSF, there are a range of opportunities for you to access compensation through your insurances and the courts and a number of other areas,” she said.

“And there have been PI covers that have allowed 100 per cent payout, and court payouts that have allowed 100 per cent payouts, and AAT payouts that have allowed 100 per cent payouts for fraud and theft.

“These avenues are working and they are working well,” Slattery reinforced. “That doesn’t mean that it’s easy and it doesn’t mean that it’s simple.

“But it means that if you’re in an SMSF, there are a range of options already. There is simply no reason for a levy.”

Indeed, the reality for SMSFs seems to be that the sector’s issues, or more particularly their significance, are diminishing. 

For Vamos, the sector has experienced a definite change, one that may indicate its coming of age.

“I think we’re seeing a change in self-managed funds and as more and more of the larger providers get involved, we’re starting to see a framework develop that is more robust,” she said.

“And clearly that’s a good thing.

“The emergence of self-managed funds is, in many respects, the emergence of individually-managed accounts,” Vamos continued.

“And so it will be interesting to look at the concept of individually managed accounts and how achievable it is in the pooled area because of technology.

“But the bottom line is that self-managed funds, like pools, are a vehicle and that vehicle is changing for all sectors.”

For Slattery, the strength of self-managed super funds lies in the fact that they are a life decision.

“It’s not like going into a bank and opening up an account,” she said. “You’re looking at something that’s a small fund where the trustees are the members and the members are the trustees.

“You actually get control over how you accumulate, why you accumulate, what you do, and how it fits into all the other aspects of your life,” Slattery continued.

“But what we forget in this industry’s bickering is the fact that we have such a broad and diverse range of super options that actually complement each other.

“We forget that through this industry and its options, all Australians have an opportunity to benefit themselves, to become engaged at their own level of experience and, ultimately, to fulfil their retirement savings goals – that’s just a wonderful, wonderful thing.”