Olivia Long

There should be no barriers to establishing an SMSF, either educational or fund balance, said Olivia Long, CEO of Xpress Super and Super Guardian, the specialist self-managed super fund (SMSF) administrator, in a submission to the Financial Service Inquiry (FSI).

“We would urge the FSI not to impose a minimum of funds under management before people are allowed to establish a SMSF,” she said.

“In 2010, the Cooper Review looked at minimum balances and decided against setting a limit, and we are hopeful that the FSI will reach the same conclusion.

“Since Cooper’s report there’s been no evidence that trustees are proving to be anything less than diligent managers of their superannuation, whether it’s judged in terms of compliance or investment returns, which strongly suggests the status quo should remain.”

Long says that SMSF trustees with low balances do pay a higher percentage in fees compared with APRA-regulated funds, but we argue “these people have decided that’s a price worth paying to be engaged with their superannuation.

“It will have long-term benefits in terms of these people being more likely to be self-sufficient in retirement as our evidence shows they quickly get their funds under management up to a limit where their fee structures are on a par or even cheaper than the APRA funds.

[Australian Taxation Office (ATO) statistics show that the average operating expense ratio of SMSFs fell over the four years to 2010–11 and was stable in 2011–12. This contrasts with the estimated average operating expenses of APRA funds that increased from 2010 to 2012.]

“In addition, there are flow-on benefits to all other areas of their financial lives – provided they are given all the facts when they set up a fund, their balance should not be determining factor.

“As people live longer, it is even more important that they are engaged in their superannuation at an earlier age, not less.

“The recent Roy Morgan Research ‘Superannuation Satisfaction’ report shows, people using trustees are more engaged with their superannuation compared with the industry and retail funds.”

Long also cited ATO statistics to dismiss claims that SMSFs trustees are naïve in their investments.

“The ATO found that ‘SMSFs are both flexible and resilient in their ability to concentrate or diversify asset portfolios with an ability to respond to changing economic circumstances’.

“The numbers show this: the ATO reported that the estimates of the return on assets for the SMSF sector was positive in 2011–12. And while lower than the positive returns in 2009–10 and 2010–11, the trend is consistent with APRA funds. 

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The Self Managed Super Fund Professionals Association (SPAA) has today called for a universal increase in the concessional superannuation contributions limit (cap) to $50,000 a year for all individuals aged 50+, so they can plan a comfortable retirement.

SPAA has recommended that a $50,000 annual cap apply to everyone aged 50+ regardless of their current superannuation balance and has rejected a government proposal to only raise the concessional contribution cap for those age 50+ who have superannuation account balances of $500,000 or less from July, 2012.

“SPAA supports raising the concessional contributions cap for individuals aged over 50. However, SPAA believes an arbitrary and unindexed $500,000 balance threshold would be overly complex and impose unnecessary costs while discriminating against people who make voluntary non-concessional contributions from after-tax dollars,” said Andrea Slattery, SPAA CEO.

She said some people may also mistake the threshold figure of $500,000 as adequate. Recent University of NSW research** shows someone on an average wage of $60,000 a year will need $1.2 million at retirement while someone on $80,000 will need $1.6 million – a sum 20 times their incomes.

“As an alternative to the $500,000 threshold, SPAA has recommended the concessional cap be increased from $25,000 to a suitably higher amount for all individuals over age 50 to give them the opportunity to contribute more to super in the years leading up to retirement,” Ms Slattery said.

“If the Government decides to retain the $500,000 threshold, SPAA recommends that only concessional contributions and investment earnings be counted against it. Given that only concessional contributions and fund investment earnings are subject to concessional tax treatment, SPAA believes only the member’s concessional contributions should count against the $500,000 threshold,” Ms Slattery said.

SPAA fears using an arbitrary threshold superannuation balance of $500,000 will impose onerous reporting obligations and complexities experienced under the former Reasonable Benefit Limit (RBL) system. This appears contrary to the Cooper Review’s focus on improving the efficiency of the system.

“Having an arbitrary $500,000 account balance threshold which is unindexed may also result in an increase in the number of individuals inadvertently breaching the contribution caps,” Ms Slattery said.

The Federal Government has announced the annual concessional cap for those aged 50+ will be permanently increased to $50,000 a year as of July 1, 2012. SPAA’s recommendations regarding this proposal are contained in its submission to Treasury on concessional superannuation contributions caps for individuals age 50+.

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Russell Investments is calling on trustees and industry regulators to consider more than just current assets and membership when applying a “test of sufficient scale”. Russell suggests a scale test which incorporates assets, membership, growth, net investment performance and operating reserves. This follows the government’s support of the Cooper recommendation for fund trustees to assess whether they have sufficient scale to support a MySuper product. Many are expecting regulators to step in with scale requirements based on size of assets under management (AUM) leaving the industry divided as to what the requirement should be.

While Russell thinks size can bring cost efficiencies, looking at size alone could potentially close down some high performing funds. This could leave the market dominated by large funds or force unnecessary mergers.

“While we agree trustees should ensure they have the scale benefits to support a MySuper option, focusing purely on current size may cause the industry to lose some of its better performers, to the detriment of members, ” said Tony Miller, senior consultant for Russell Actuarial.

Mr Miller said that without careful consideration of the issues, many medium sized funds run the risk of falling below an arbitrarily selected size limit (depending on where it is drawn) but have other features which make them competitive and good value for money. For example they may know their members particularly well, have good cost structures and performance and can tailor services accordingly.

In addition, basing scale on size does not recognise new or growing funds. For example, a fund could potentially fail under size requirements even though its projected member growth means it could comfortably pass a size test in three or four years’ time.

“Not everybody values service quality to the same degree when it comes to rationalising on cost. Big does not always lead to better service quality and therefore better overall outcomes for members. The cost to a member of inappropriate, slow or poorly executed advice at a critical time may be more than all the cost efficiency gains of a larger fund,” he said.

He also suggests long term investment performance credited to members, net of fees, could also be objectively examined by trustees to ensure persistent good performance is adequately recognised.

Mr Miller also believes scale is about the capacity to absorb market shocks and meet future contingencies without drawing heavily on members, so also recommends fund specific liquidity and other tests around the ability to sustain a certain level of operating reserve.

Knowing your fund first

The expectation of ever increasing regulation has left funds considering how they will respond to this new set of challenges.

Mr Miller says that “before trustees become overly concerned about lack of scale we urge them to first examine what they really need by assessing a variety of factors including future growth potential, member retention levels, age demographics and liquidity as well as their objectives and relationship with their members.”

There are many aspects to “scale” and Mr Miller affirms what is already being seen – that for many funds there are alternatives to a merger such as outsourcing operating functions like administration to cut back on costs and arrangements to gain access to investment scale.

Last year Russell launched its Total Fund Evaluator, a comprehensive tool that allows a super fund to model future cash flows based on member movements including investment choice decisions and market conditions. Russell’s modelling tool allows a highly complex analysis ideally suited to providing much of the information needed by trustees to undertake a test of sufficient scale.

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The Self Managed Super Fund Professionals’ Association has today predicted a year of clarity for the SMSF sector on issues such as limited recourse borrowing, replacement of the accountants’ exemption and new rules for holding collectables in SMSFs. In new issues, SPAA expects greater Australian Tax Office focus on SMSFs which are paying pensions, while SPAA intends to look for ways to help SMSFs better access wholesale investments.

In a keynote address to the SPAA National Conference in Brisbane today, on key legislative and technical issues impacting on the SMSF sector, SPAA National Technical Director Peter Burgess said SPAA was also optimistic about a resolution to the excess contributions tax issue this year.

“We see 2011 as a year of consolidation following the Cooper Review and consultations on the Future of Financial Advice (FoFA) reforms,” Mr Burgess said.

“We look forward to clarification of the limited recourse borrowing rules, in particular, to a softening in the ATO’s interpretation of them. Currently, SMSFs can only borrow against a ‘single acquirable asset’ and asset improvements are banned. The Queensland floods highlighted the inflexibility of these rules and, unless changes are made to them, or to the ATO’s interpretation, it is difficult to see many SMSFs using them,” Mr Burgess said.

Mr Burgess told the conference that SPAA hopes that some relief will be granted to SMSF investors who have inadvertently contributed in excess of their contribution caps.

“SPAA has already recommended that excess contributions made in error by SMSF members be refunded and that those at risk of excess concessional contributions be allowed to opt out in advance in certain situations.”

Mr Burgess said the introduction of new rules governing collectables and personal use assets from 1 July 2011 are likely to have a significant impact on how those investments are acquired and held by SMSFs.

However, he noted that the government had last year signalled its approval of the SPAA Guidelines on valuing, auditing and documenting of artwork and collectables in SMSFs.

“SMSF auditor registration and auditor independence, as recommended by the Cooper Review, are also likely to be important issues, along with the accountants’ exemption and what will replace it,” he said.

Mr Burgess said a “sleeper issue” for SMSFs this year is the expectation of greater Australian Tax Office attention on SMSFs paying pensions. Fund assets supporting pension payments are tax exempt. The ATO would likely focus on ensuring that only SMSFs entitled to, claim this exemption.

A new issue for SPAA and SMSF investors is how a SMSF trustee might gain access to a wider range of investments through access to wholesale investment markets.

“An issue which has been on SPAA’s radar for some time is the current distinction between wholesale and retail investors and we are pleased to see this issue being discussed as part of the FoFA reforms.”

“SPAA believes existing rules cause confusion and restrict the ability of trustees to access investment opportunities. At the same time, SPAA is keen to ensure SMSF trustees retain consumer protections under the law,” Mr Burgess said.

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The Russell After-Tax Australian Shares Fund (for Superannuation Investors) uses sophisticated tax strategies with the aim of enhancing after-tax returns (net of fees) while using Russell’s proven skills in active portfolio management to provide exposure to a diversified portfolio of Australian equities.

“As recognised by the Cooper Review, tax implications can have a significant impact on investment returns. Despite this, there is a widespread lack of awareness around after-tax investing (ATI) and a dearth of products that combine active management with tax strategies,” said Raewyn Williams, Director, After-Tax investment Strategies at Russell Investments.

Russell believes ATI starts with providing visibility to after-tax outcomes – something surprisingly hard to find – but must go beyond this and integrate tax awareness into the overall investment process. Responding to this need, Russell’s fund encompasses a variety of sophisticated strategies encompassing turnover management, emulation, CGT optimisation and preservation of franking credits. “The focus of these strategies will not be on tax minimisation but, rather, on enhancing overall returns on an after-tax basis as valued by superannuation investors” Ms Williams said.

The fund is groundbreaking in that it is a distributing fund, providing pooling and scale benefits, but tailored to maximise returns for those on a 15% tax rate rather than compromising tax decisions for those on different tax rates. It will target superannuation investors, from large industry, public sector and corporate funds right through to smaller self-managed super funds (SMSFs). The fund has adopted an after-tax benchmark – the FTSE ASFA Australia 200 Superannuation Index – in recognition of the importance of this outcome for superannuation investors.

Scenario driven turnover strategies

Ms Williams said many superannuation funds are told a low turnover approach is adequate to manage tax implications, however she cautioned this is an overly simplistic approach that does not always provide the best after-tax outcome. Russell’s new fund is instead adopting a ‘turnover management’ approach where trading is more flexible. For example, in an up market, the fund will favour lower turnover by lagging trades to defer tax by not realising a capital gain. Conversely, in a down market, the fund will relax turnover guidelines if a loss can be realised by trading to offset other realised gains to reduce tax.

Proven underlying investment strategies

The fund uses Russell’s emulation strategy, structured to capture alpha-seeking insights from multiple managers, and implemented as a centrally managed portfolio. This results in turnover being about 40% lower than in a typical multi manager approach. Kathy Cave, Portfolio Manager of Russell’s very successful Tracker Fund which uses emulation and has been running since 2006 with AUM of $2bn as at 31 Dec 2010, will manage the new fund. “The Tracker approach not only reduces the base line turnover, but allows us to implement the tax strategies on a ‘parcel-by-parcel’ basis” said Kathy Cave. Initially the managers in the fund will be aligned with those in the Russell Australian Share Fund. In order to boost the franking credit benefits to investors, there will be an allocation to the Russell High Dividend Australian Shares ETF, RDV. The current gross-of-franking yield on RDV is 7.2% compared to the broader market gross yield of 5.6%.

Share buybacks will also be a focus as off market share buybacks may present lost opportunities for traditional funds which do not participate because of their pre-tax focus and/or the different tax profiles of their investor base. For example, last year’s Woolworths buyback offered after-tax returns a boost for superannuation investors but detracted for individual investors with higher tax rates. Russell’s new fund will be positioned to obtain maximum after-tax benefits by participating in share buybacks that are advantageous for superannuation investors. “We have built a highly sophisticated solution in an easily accessible package – an after-tax approach will increase a fund’s returns without compromising the underlying investment decisions,” Ms Williams concluded. “We are pleased to be able to offer this to superannuation funds to help increase their returns – which will ultimately mean a better outcome for investors.”

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The Self Managed Super Fund Professionals’ Association has today voiced its support for draft legislation released yesterday which will allow self managed super funds to continue to invest in collectables and personal use assets such as artwork and stamps.

The draft legislation will allow the Government to make regulations about how SMSFs can make, hold and realise investments in collectables and personal use assets.

“We recognise the draft legislation as the first concrete step by the Government in keeping its promise to SMSF investors that they continue to be allowed to invest in artwork and collectibles,” said Sharyn Long,
SPAA Chairman.

“The draft legislation amends the Superannuation Industry Supervision Act (SIS) Act so regulations can be made which impose rules on SMSF trustees with regard to collectables and personal use assets.”

“The amendments to Section 62A of the SIS Act will also make clear that it is not a breach of the sole purpose test to have artwork and collectibles in a SMSF portfolio,” Ms Long said.

Originally, the Cooper Review concluded that artwork and collectibles lend themselves to personal enjoyment and current day benefits, so recommended these assets be banned from super funds, which are designed for the sole purpose of retirement benefits. In its response to the Cooper Review, the Government said it would continue to allow investment in artwork and collectibles, but stated that it would make clear rules setting out how SMSFs should hold these assets. In that vein, the Government has stated its support for a SPAA guideline which makes recommendations for holding, valuing and auditing these assets.

“We welcome the transitional arrangements proposed that gives SMSF investors 5 years until July 2016 to dispose of existing artwork or collectibles in their SMSF portfolios, if they are unable to comply with the new rules,” Ms Long said.

“SPAA looks forward to consulting with Government on the content of the new rules and hopes that they include the SPAA Best Practice Guideline for acquiring and holding artworks in a SMSF,” Ms Long said.

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Robin Bowerman, Head of Retail, Vanguard Investments Australia said: “The focus on cost – and the proposal that trustees will have specific new duties to deliver value for money in terms of long-term net returns – is commendable. The emphasis of MySuper is on delivering value for money for members and by focussing the trustees obligations on net returns the aim is to put downward pressure on fees to the tune of around $550 million a year in the short term rising to $1.7 billion a year over the longer term. Those numbers may be hard to relate to in terms of average account balances for super fund members but the key feature of MySuper is a single diversified investment strategy that will be easier to compare on a net return basis between different funds”

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Bozenna Hinton, Institute President, said the Institute supports the concept of an identifiable risk reserve for superannuation funds held separately from member account balances. She said the minimum level for this should be set on a risk assessed basis consistent with other financial services industries.

“We are pleased that the Government will consider a risk based system for all APRA regulated super funds requiring them to hold financial resources against operational risk, as we recommended this in our submissions to the Cooper Review,” Ms Hinton said. “We note that the Government will consult with relevant stakeholders on whether such a system should require resources to be held in the form of trustee capital or an operational risk reserve in the fund.”

The Institute confirms that as part of this process, a Financial Condition Report for accumulation super funds should eventually become compulsory, but in the meantime should be considered best practice. Such a report would allow trustees to stress test a super fund under different market conditions.

Support for idea that super funds consider longevity risk but more work needed The Institute also supports the recommendation that both MySuper and choice super funds be explicitly required to consider longevity and inflation risk. However, Ms Hinton said more concrete measures were needed.

“As a next step, we encourage the Government to remove the roadblocks preventing innovation and product development in the post retirement product market including social security and tax barriers.

Development of new post retirement products will better equip Australians to protect themselves against their own longevity risk,” Ms Hinton said.

The Government has also indicated that while it does not support mandatory retirement forecasts for MySuper products, it will ask the Australian Securities and Investments Commission to continue working on developments in this area.

“The Institute strongly supports the idea of retirement forecasts being provided to super fund members so is disappointed about this outcome. However, we look forward to working with ASIC particularly in relation to the assumptions used for such forecasts and how the results could be presented,” Ms Hinton said.

“Similarly, we look forward to working with APRA and ASIC regarding the publication of superannuation data designed to improve transparency and comparability in relation to net investment performance fees and costs,” Ms Hinton said.

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The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has today welcomed the Federal Government’s response to the Cooper Review recommendations on the $409 billion self-managed superannuation sector which include no additional investment restrictions for SMSFs, higher standards for SMSF advisers and consideration of a ‘restricted licence’ arrangement for accountants who provide limited superannuation advice.

“The minimal Government measures announced in response to the Cooper Review for SMSFs are further confirmation that the sector is performing well and does not need significant intervention or overhaul,” said Sharyn Long, SPAA Chairman. “SPAA believes SMSF investments should be free from government intervention as far as possible.”

“We are particularly pleased the Federal Government has listened to our feedback and has decided not to impose additional restrictions on where or what SMSFs can invest in,” Ms Long said. “We particularly note the Government’s comment that there is no evidence that current in-house asset investment rules have caused any “detriment” to SMSFs.”

The Cooper Review recommended that the 5% in-house asset limit be removed so that no IHA investments be permitted and that SMSFs with existing IHA assets be given five years to exit them. An early version of the Cooper report also recommended that artwork and collectables be banned as investments in SMSFs too, but in July the Government endorsed a set of best practice guidelines for collectables in SMSFs developed by SPAA and the Australian Artists Association and this has been retained.

Ms Long said SPAA endorsed the ASIC registration requirement for SMSF auditors, but said more information was needed on the detail, in particular on the proposal that the Australian Tax Office police SMSF auditors. “However, SPAA is very pleased the Government has announced a review of the Cooper Review recommendation on SMSF auditor independence, as we believe it is unworkable in its current form.”

“We note that the Government has referred the accountants’ exemption issue to the Future of Financial Advice reform process, but its response suggests the door remains open for the use of a restricted licence
for accountants who provide non-investment advice on superannuation,” Ms Long said. She noted that the Cooper Review had recommended a full Australian Financial Services Licence replace the
accountants’ exemption.

She said SPAA supported the Cooper and Government move to develop an SMSF specialist knowledge component of advice standard RG146 because there was a need to improve this basic standard for superannuation advice.

“We have argued in our Cooper submissions that the SPAA Specialist Auditor (SSAud) and SPAA Specialist Advisor (SSA) accreditations be used as the basis for improved advice standards in the SMSF
sector,” she said.

SPAA has also been assisting the ATO on measures to reduce instances of fraud and illegal early access and endorses the Government’s move to require verification of identity and other checks.

On issues of concern, Ms Long noted that the Government had rejected a Cooper recommendation to allow the ATO to issue binding rulings in relation to SMSFs.

“We are disappointed the Government response to Cooper has ruled out the use of Australian Tax Office binding rulings in relation to SMSFs, as we believe such rulings can provide clarity and certainty for SMSF
trustees,” said Ms Long.

“We look forward to participating in the Government’s consultative group and sub-groups on the implementation of the Cooper reforms that it has adopted.”

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The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has welcomed comments in the media this week by Cooper Panel chairman Jeremy Cooper about the high level of competency and financial expertise of SMSF trustees, but has questioned speculation about whether trustee quality could be eroded by future sector growth.

The final Cooper panel report, released by Jeremy Cooper in July called the $390 billion SMSF sector, the largest by assets in the $1.2 trillion super system, “well functioning and successful”. The SMSF sector is
home to 428,000 funds and 815,000 trustees with an average member balance of $480,000.

“We agree with Jeremy Cooper, chairman of the Cooper Panel, that the SMSF sector is successful due to the high level of competency and financial expertise of those who set them up and we intend to see that
standard increased through pushing for higher standards for advisers, while expanding educational opportunities for trustees,” said Sharyn Long, chairman of SPAA.

“SPAA is supportive of the Cooper Review’s recommendations for higher competencies for SMSF auditors and advisers and has advocated for this through our contribution to the Cooper Review process and the Future of Financial Advice (FoFA) reform process,” said Ms Long.

She said SPAA has witnessed growing numbers of advisers applying for and completing accreditation as either a SPAA Specialist Adviser or a SPAA Specialist Auditor.

On the SMSF trustee front, Ms Long said SPAA, in an industry first, had recently launched an SMSF trustee education curriculum guide to encourage education providers and industry practitioners to create and provide SMSF trustee training.

“We believe that as the numbers of funds and member balances grow, more and more trustees will seek to educate themselves about their responsibilities and obligations, many of them encouraged by their advisers,” Ms Long said.

Ms Long said SPAA would continue to work closely with regulator, the Australian Tax Office (ATO) on issues affecting the SMSF sector and with the APRA regulated fund sector on industry matters.

“SPAA supports comments made by Superannuation Minister Bill Shorten and company director and former Olympics luminary, Rod McGeoch, at the Association of Superannuation Funds of Australia conference this week, that fund sectors should work together to improve the industry and the outcomes for fund members,” Ms Long said.

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