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SMSFs ignored in global ranking

12 Nov 2021 6 month(s) ago

The $820 billion SMSF sector does not get a look in in a major world ranking. Its importance should be better understood.

The Mercer CFA Institute Global Pension Index has been released. The SMSF sector, incorporating some 600,000 funds that collectively hold approximately $820 billion (as at 30 June 2021) were not considered. Bit of a miss. Only the APRA-regulated part of Australia’s $3.3 trillion super system was rated: about 150 corporate, industry, public sector and retail funds.

The Index ranks super funds on: Adequacy (40%), Sustainability (35%) and Integrity (25%). Australia was sixth out of 43. In many ways it is perhaps more about the fashions sweeping the finance industry than a more hard nosed assessment of what they actually do in providing value.

Harry Chemay, writing in FirstLinks, makes the obvious point that pension systems exist to provide benefits in retirement, and the best systems deliver that goal to the greatest number by the most robust means possible:

“Only now, some seven years and numerous consultations, white papers, green papers, roundtables and conferences later, has a legislative framework been implemented to bring the David Murray-led Financial System Inquiry ‘Comprehensive Income Products for Retirement’ (CIPR) vision to life, at least partially.

“As from 1 July 2022, super fund trustees will be required to have a Retirement Income Covenant in place for members; essentially a document that details how they propose to create retirement income products to cater for their retiring members. Retirement income strategies can either be developed to treat all retiring members equally, or to separate members into cohorts based on characteristics the trustee deems most relevant.

“In some ways, APRA-regulated super funds are playing catch-up with the SMSF sector which has long had a focus on the decumulation phase. Lessons learned in SMSF pensions may well, somewhat ironically, find their way to the APRA-regulated space.”

Fees and costs in Australia are well above the world average. A nice little earner for super funds. In 2016 Australia was the sixth most expensive in the world and it has probably improved little since:

Chemay notes that financial conglomerates, and most of the big four banks, have exited retail superannuation altogether. And there are other improvements:

“The recently-enacted ‘Your Future, Your Super’ package has just seen the commencement of account stapling, so that one super account follows an individual through any number of employment changes, and a new annual investment performance test, the first of which saw 13 MySuper products fail to come within -0.5% p.a. of their respective risk-adjusted benchmarks.

“And then there is the new Best Financial Interests Duty (BFID), which places a statutory obligation on super fund trustees to do all things necessary to ensure that spending is best directed to the advancement of member outcomes. The days of profligacy in certain parts of the super sector now appear numbered.

“The message being sent to the superannuation industry is as clear as it is stark: cost matters in providing appropriate member outcomes. If you can’t meet that challenge through scale, you should consider your position.

“The reason is simple enough, as the Mercer CFA Institute Global Pension Index report states: ‘it is likely that as funds increase in size, their costs as a proportion of assets will reduce and some (or all) of these benefits will be passed onto members.’”

Well, yes, they should. But in many cases costs as a proportion of assets have stayed constant. It is why many people prefer to take out SMSFs rather than give a cut to managers.

 

Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.

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