The Murray Report’s recommendation to ban SMSFs from borrowing is inconsistent

From
Peter Townsend

Peter Townsend

The Murray Report’s recommendation to ban SMSFs from borrowing is inconsistent and based on a flawed approach to the regulation of the superannuation system.

The Report’s argument that superannuation should be treated as a savings vehicle for retirement income rather than a broader wealth management vehicle is a totally new way of viewing the role of superannuation which, if it were to be accepted consistently and fully, would see funds banned from investing in anything other than the safest and least volatile of investments – and certainly not the share market.

Even the most blue-chip sector of the market cannot guarantee a complete lack of volatility and therefore should be more appropriately put in the ‘wealth management’ box (which is allegedly bad for super) not the ‘savings’ box.

This new characterisation of superannuation (savings only) would permit only the least volatile of investments – term deposits backed by the strength of Australian banks with their new capital adequacy requirements as recommended by the Report.

That investment strategy might be OK if you’re accumulating superannuation continuously for a working life of 40-50 years but heaven help you to save enough super if you’re

  • out of work,
  • a woman who is unemployed for various periods of time throughout her working life and generally is on lower wages anyway, or
  • self-employed and not always able to make the necessary contributions.

Oh, and of course such a strategy is great for the banks but there goes the need for any involvement by the financial planning industry – who needs an adviser to invest in term deposits?

The whole notion of super as solely a savings vehicle is fraught with difficulties and deeply flawed. It has never been the basis of our approach to superannuation and cuts across every other area of financial management.

The suggestion that borrowing be banned because it is not in keeping with that ‘savings vehicle’ philosophy is biased against SMSFs unless public offer funds are similarly turned into solely savings vehicles.

The truth of the matter is that with assets subject to borrowing accounting for only about 1.7% of all assets held by SMSFs the borrowing ban is a solution to a non-problem. It is designed to make the public offer funds feel better after the Report severely criticised their fees and has nothing to do with the proper administration of self-managed superannuation.

As always it is not regulation that is necessary but education.  Not mindless guff about how to be a trustee but rather about the strengths and weaknesses of gearing as an investment strategy.  The only requirement should be that the person understands what they are risking by using the strategy.

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