Big PictureMacro Trends
The SMSF revolution will transform Australia
26 Apr 2022
2 month(s) ago
The SMSF Association has just completed its annual conference in Adelaide. Those participating in the sector do not necessarily see themselves as creating a financial revolution, but they are.
The SMSF Association’s annual conference was held in Adelaide. Most of the presentations concentrated on technical and regulatory issues, which of course advisors have to understand and be able to present to clients with great accuracy.
Unsurprisingly, for a sector that is approaching $1 trillion in funds under management, it attracts a lot of attention from government and regulators. The mood in the conference was that it attracts far too much. Constant tinkering with the rules has led to a daunting degree of complexity.
The success of super generally, and SMSFs in particular, is in some ways their greatest problem. They have transformed Australia’s financial sector and capital markets. Super is over $3 trillion, more than 50% bigger than Australia’s stock market. It has meant that some of the money has had to go offshore because there are simply not enough places to put it here.
In the 1990s a cliche in the financial press was that Australia will always have to attract foreign capital because there is not enough here. That situation has been completely reversed. We will probably not have a current account deficit for a very long time.
Advising well on super requires a broad range of skills: technical knowledge, knowledge of the law, knowledge of investment markets and risk management, and, most of all, an understanding of human psychology.
Tim Miller, education manager at SuperGuardian, gave a talk on how to execute the right pension for clients, which involves attending to all of the abovementioned areas. Balancing those imperatives has become more complex, especially as the law has changed. Academics Ralph Zurbruegg and George Mihaylov showed how SMSFs perform in a fashion roughly similar to APRA funds, and that having $300,000, not $500,000 is enough to make an SMSF cost effective. Philip la Greca, executive manager, SMSF Technical & Strategic Solutions at SuperConcepts, argued that the tests of competence now being applied to APRA funds, which is leading to weaker performing funds having to merge with stronger ones, will eventually be applied to SMSFs too. He acknowledges that at the moment this would be difficult to measure, but says the benchmarks are coming.
Auditor Melanie Dunn gave a talk on sequencing risks, which is how to ensure that the types of investments are matched to the needs of the investors, especially when they become retirees. This kind of long term view, especially when it is based on stochastic modelling (multiple possible scenarios) can be a useful tool to navigate through unpredictable markets. Interestingly, the assumption seems to be that a happy retirement is an income of $70,000 a year.
There are big amounts of money involved. As one attendee said, he had seen an SMSF fund that had over $1 billion, and many have hundreds of millions in them. It is tax advantaged and attracting large inputs. That could easily lead to more regulatory initiatives and complexity as governments tries to ensure social equity.
But the systemic implications are profound. The United States and Europe have a huge unfunded pension liability problem, which will only get worse as their populations age. Australia, however, does not. That portion of pensions that is superannuation is, by definition, fully funded. And it takes the pressure off government pensions for people who do not have enough super to live off, which was the initial idea.
It means that Australia’s financial system over the next few decades will be very different and much more healthy. Despite all the regulatory tinkering.
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