12th Jun 2018
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The super fund that wants tougher regulations for the industry
Author: Ben Hocking
Super fund calls for tougher rules

Real Estate Industry Super (REI Super) has called for stricter controls on the establishment of self-managed superannuation funds (SMSFs) with small account balances.

The Productivity Commission’s recently released draft report on superannuation found that SMSFs with low account balances performed “significantly worse” than APRA-regulated funds.

The Productivity Commission’s draft report confirms recent Australian Tax Office data on the performance of SMSFs, which show that very low balance SMSFs are unsustainable – often delivering negative returns – and that a lack of scale is a major risk to members.

REI Super is calling for new rules to make it harder for people with under $200,000 in their super to set up an SMSF.

The Productivity Commission’s draft report found that “many smaller SMSFs (those with balances under $1 million in assets) have delivered materially lower returns on average than larger SMSFs.”

It found that “costs for low-balance SMSFs are particularly high, and significantly more so than APRA-regulated funds. These high costs are the primary cause of the poor net returns experienced by small SMSFs on average.”

The Royal Commission into the Banking and Financial Services Industry has also unearthed numerous cases of financial advisers pushing people with small superannuation balances into SMSFs, without considering whether it is in their best interests.

REI Super Chief Executive Mal Smith said the ATO data showed that approximately one in five SMSFs have account balances of $200,000 or under.

“This is a significant proportion of the superannuation industry to be subject to such considerable risk,” Mr Smith said.

“The data is clear and shows that you need an average of $2 million in your SMSF until you start to match the returns of APRA-regulated funds.”

Mr Smith said the fund had recently spoken to several REI Super members who set up an SMSF, only to return to the fund after realising it was a mistake – due to low returns and hidden costs.

“One member with an account balance of $100,000 was advised to go into an SMSF by her accountant,” Mr Smith said. 

“Another member was given bad advice and set up an SMSF with her husband with a combined account balance of $300,000. 

“Like the other members we spoke to, they have returned to REI Super, where they have told us they are better off. 

“They told us they were not prepared for how hard it was, how much time it took, and how much expertise was required to make informed investment decisions.”

Mr Smith said it shouldn’t be as easy as it is to set up an SMSF when good returns on low balances are, on average, not achieved.

“Changes to SMSF rules would help prevent financial advisers from encouraging people into an SMSF when it is not in their best interest,” Mr Smith said.

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    COMMENTS

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    Not a Bludger
    13th Jun 2018
    10:24am
    Just another rent seeker trying to gain control ( for fees, of course) of other peoples’ money via legislation.
    Industry funds and their thug union boss directors are the worst in this respect yet some of them are the worst performing funds in the country.
    I, for one, shall fight tooth and nail to control my own money and stand by my own decisions.
    George
    13th Jun 2018
    11:52am
    Sure, as long as anyone going into SMSFs also have to submit a formal declaration that they will never ask for the Age Pension even if they blew up their money foolishly in such ventures.
    Rae
    13th Jun 2018
    1:00pm
    But George you'd have to have a guarantee of money in the Superannuation Fund as well and they will never give that guarantee. Even cash isn't guaranteed in a Fund as it is in a SMSF if the cash is in an ADI.

    What about those who take their lump sum and spend the lot of it.

    Anyhow why do SMSF worry you?
    George
    13th Jun 2018
    11:39pm
    Rae, did you not read in the article that the "Royal Commission into the Banking and Financial Services Industry has also unearthed numerous cases of financial advisers pushing people with small superannuation balances into SMSFs, without considering whether it is in their best interests"? Surely you have some concern about people losing their hard-earned retirement savings through bad advice!

    Yes, of course people taking out excessive amounts as lump sums and blowing them up is yet another problem. I don't have the answer for every issue raised with the current massively defective system - except my solution for Universal Pension as in my separate comment further down.
    OnlyGenuineRainey
    14th Jun 2018
    7:34am
    Aren't you contradicting yourself, George? People lose money in all sorts of ways - sometimes irresponsibly and often through no fault of their own. An SMSF might be no riskier than any other fund or, indeed, keeping the money in your own name. Realistically, the guy with only $200,000 to set up an SMSF would probably be better holding that money personally in retirement, and would he then be punished if he made an investment mistake?

    Gamblers and drinkers and holiday-makers and party lovers and folk who waste money buying new cars every year and trading in at a loss a year later can all claim aged pensions. Millionaires like BigBear can give their money away and claim a pension. Why would we discriminate against the poor fellow who set up an SMSF with good intentions but make investment mistakes?
    George
    14th Jun 2018
    11:28pm
    OGR, I can't see any contradiction in what I said. It is the current (and previous Labor) Govt's attitude that they want to control everything with the express intention of denying the age pension to as many people as possible which is the source of all these issues - whether someone lost their money deliberately or foolishly (such as going for a SMSF with only $200K if they don't have strong financial skills, else if they had the skills then why do they only have $200K?). If the Govt wants to want to continue down the current path, then they will end up having to put more and more restrictions on what people do with their savings, with SMSFs currently an area which is out of control needing urgent (may be temporary) action.

    However, as I also clearly indicated, the above approach is far from ideal. I do NOT support this Govt's stupid approach of rewarding reckless / foolish or deliberately irresponsible behaviour, but punishing the responsible savers, nor do I prefer more and more rules to tighten who gets Age Pension. Hence, my ideal recommendation being for Universal Pension - then the Govt can get off everyone's back and let all do what they want with their own money - as the Age Pension would still act as the safety net.
    OnlyGenuineRainey
    17th Jun 2018
    2:44am
    So someone who saved $1 million for retirement is not financially responsible enough to manage their own money? The couple who pay off a home and save $840,000 are too wealthy to need a pension (according to the current government), yet not smart enough to manage their own financial affairs?

    Shorten is now saying that if someone saves $840,000, they should NEVER qualify for franking credits - no matter what their future financial status or why, so I guess it shouldn't surprise if politicians decided those who save less than $2 million should suffer both removal of their freedom to manage their own finances or removal of their access to what SHOULD be a universal safety net.

    The whole system is a disastrous mess and it seems all the government and so-called ''expert'' advisers can do is dream up mean ways to make it worse. Deficit growing? Attack retirees yet again. I noted a prominent adviser saying SAPTO should be removed to save a few more billion. I suspect the government and their erstwhile ''advisers'' won't be content until all retirees other than the very wealthy are poverty-stricken and begging for crumbs. Heaven forbid we be allowed to actually enjoy the retirement we worked and saved so hard for - much less leave anything behind for loved ones, no matter how much we chose to sacrifice to try to leave something to make their lives better.
    Old Geezer
    18th Jun 2018
    2:15pm
    OGR I have my doubts if people collecting a pension form their super fund are getting the benefit of their franking credits now. One has to ask is this non refund of franking credits just a cover up of what is going on now with super funds?
    Huskie
    13th Jun 2018
    11:04am
    Not a Bludger - As long as you have a significant amount in your SMSF (at least $500k) you may be OK, but may also fall by your decisions. I worked for APRA when they regulated the SMSFs and many times had to explain to a Trustee that in a lot of instances, especially if the Fund had a low balance, the cost of running the Fund exceeded the income. Many also said that they were advised to set it up by an accountant or financial advisor who stood to gain from that fundamentally flawed advice.

    As point of fact the Industry Super funds are run by a Board of Directors that have equal representation from Employers and Unions so it is not possible for one side to dominate. In fact it is an excellent example of Employers and Employee representatives working together for the benefit of their constituents. That is one of the main reasons they were set up! Another reason was that it reduced the incidence of "lost Super" as the Industry fund was transportable by the Employee if they changed Employers within the same industry

    I strongly suggest that you research, and understand, the rational for and management structure of Industry Super Funds before making any comment
    dreamer
    13th Jun 2018
    11:35am
    Huskie your remarks regarding industry super is smack on its a shame that some people don't look into it
    George
    13th Jun 2018
    12:02pm
    Excellent comments, Huskie.
    Also, great summary comment about the issues from Mr.Smith "..they were not prepared for how hard it was, how much time it took, and how much expertise was required to make informed investment decisions".

    My only issue is with APRA who seems to only tinker around the edges and simply whisper "there could be a fire if you go there" when there are already heaps of fires burning! Also, only acting after the event, if at all (refer to the issues in the RC)! Why don't they simply enforce a rule - No one should be allowed to set up SMSFs without at least $2Mil (if that's a reasonable level as Mr. Smith has suggested, which APRA SHOULD know), and only after giving an Undertaking never to ask for the Age Pension if they blew it up.

    Otherwise, my ideal solution is always there - Govt should simply scrap all pensions schemes (including Politicians Special Pensions) and give everyone (based on Ag - 65 yrs, and Residency - 15 yrs) Universal Pension and then everyone can do whatever they want with their own money - invest and earn or blow it up.
    Not a Bludger
    13th Jun 2018
    1:14pm
    Maybe so, Huskie - and then as a point of fact, why do Industry Funds transfer 100’s of 1000’s of dollars to union coffers every year (see report of the recent enquiry into super funds) - no influence from union boss directors? - gimme a break!
    Rae
    13th Jun 2018
    3:32pm
    Industry Funds have an equal number of employer reps on the board so I doubt that is anything but propaganda, It's like asking why Retail Funds pay huge bonuses and commissions and payments to Banks or kickbacks to Employer Groups. Most of it is fake news.
    Not a Bludger
    13th Jun 2018
    4:49pm
    Geez - and pigs might fly.
    Fake news ie don’t let the facts (official findings of a formal enquiry into superannuation funds) get in the way of my (inexpert) opinion - strewth.
    OnlyGenuineRainey
    14th Jun 2018
    7:42am
    And where do folk go who don't qualify to be members of industry funds? Forced into retail funds that don't perform?

    It's possible to run an SMSF at very low cost, and some people have excellent financial sense and can do very well despite a low balance.

    George, I support the Universal Pension concept, but it would be grossly discriminatory and disgustingly unfair to deny people the right to manage their own fund if that is their choice, given that they can spend, gift or just lose their money in a thousand other ways and not suffer the penalty.

    According to the government, $840,000 is enough for a couple to live on WITHOUT any government help. If that is so, then it's enough to start an SMSF and enjoy the benefits of superannuation without handing control to someone you don't trust. But that balance WILL reduce over time, because government policy REQUIRES people to spend their capital, and inflation will impose a need for progressively higher drawings to compensate for not getting the pension increases others enjoy, so how is it fair to deny them an aged pension when the balance falls? That's just WRONG.
    Noodles
    14th Jun 2018
    10:42am
    The larger industry super funds are open for anyone to join.

    I had nothing to do with any union in my later working life and have been in an industry super fund for 10years after transferring from Comsec.
    Adrianus
    14th Jun 2018
    12:13pm
    Correct Parsnip, in the early days you had to be in a related industry to join the affiliated Super Fund. However, people don't fit into boxes. Many workers change occupations and Super Funds. Member retention is high on the agenda now, so its not surprising that Industry Funds are now open to anyone with a heartbeat.
    George
    14th Jun 2018
    11:38pm
    OGR, people have a responsibility not to blow their money - deliberately or foolishly, or by re-arranging as Big Bear did, and then putting their hand out to the Govt. Some safeguards need to be put in place ad currently (unless they go for Universal Pension) the system is fully broken and full of holes. Also, I never suggested $840K is sufficient to start taking excessive risks - that number may be the current Govt's defective thinking.
    Also, Industry funds accept members from anyone and are a logical choice for anyone with limited financial skills (or time or ability to learn) or low balances.
    Adrianus
    15th Jun 2018
    7:43am
    You like the idea of a Universal pension George?
    Because it stops people from being dishonest?

    Maybe that could work with bank robbers?
    If we gave them money then they would have no need to rob banks huh?
    How would that work with drug addicts?
    Let's assume for a moment that money is drugs?
    We then distribute drugs to all and therefore wipe out our drug problem?
    George
    15th Jun 2018
    1:54pm
    You clearly have no arguments against Universal Pension, Adrianus, but your masters at Liberal HQ probably want you to keep fighting for their bad policies, hence I think you have let loose an imbecilic rant!

    Yes, Universal Pension resolves a lot of issues (including incentives to do fraud), increases incentives to save / invest / earn more income / downsize, etc, etc, reduces Govt costs, and lets people get on with their lives free of big brother Govt hounding and monitoring you.
    OnlyGenuineRainey
    17th Jun 2018
    2:30am
    Adrianus, you obviously lack comprehension skills. I don't think anyone is suggesting the Universal Pension is nothing more than a solution to dishonesty. But it IS dishonest for the government not to pay a Universal Pension to those of us who paid tax all our lives believing the government's promise of an aged pension on retirement. And it is dishonest for the government to change the rules after someone has planned their retirement and implemented their plans.

    The Universal Pension would save mega-millions in administration and policing costs. It would remove stress and fear that is causing health problems among retirees. It would remove the unfairness and discrimination in the current seriously flawed system. Best of all, it would encourage people to save for old age instead of punishing them for doing so - and that would make the whole of society better off.
    OnlyGenuineRainey
    17th Jun 2018
    2:52am
    Furthermore, Adrianus, while I would never suggest that handouts are a universal panacea or a solution to either bank robbery or drug addiction, it is a fact that some who engage in crime, fraud, etc. are driven by desperation because either they have significant financial needs they can't meet, or they feel cheated or unfairly deprived. I suspect that most of the manipulation engaged in to unethically claim an aged pension is driven by resentment of an unfair system. A Universal Pension would certainly reduce resentment, but more significantly, it would end the benefit of manipulation. Alongside a fair system of taxing retirement incomes, leading economists have evidenced it would be very much cheaper than the current flawed system - and the future savings would be massive because it would restore incentives to plan and save instead of incentivizing big spend-ups, giveaways, or over-investment in the family home.
    floss
    13th Jun 2018
    11:28am
    Not a Bludger from your stupid comment can you not read.Read the offical government reports before you make such foolish statements.Huskie your comment told it like it is in the real world .I have tried both and found retail funds like the banks were a complete rip off.Try telling the truth in fucture Not a Bludger.
    Old Geezer
    14th Jun 2018
    2:54pm
    I had both overv20 years ago and my money was going backwards. Set up a SMSF and made many times my money since. If I couldn't have a SMSF I would not have super at all.
    Old Man
    13th Jun 2018
    12:38pm
    Last time I checked, Australia is a free country and we should all be allowed to make decisions about our own super as long as it is within the law. This subject has been done to death in here with bile and vitriol being heaped on bloggers who have a different view from others. To the administrators, enough is enough people, find another topic please.
    KSS
    13th Jun 2018
    2:07pm
    Yup!!
    OnlyGenuineRainey
    17th Jun 2018
    2:45am
    Nope! Not really a free country at all, sadly.
    Fready
    18th Jun 2018
    2:13pm
    Those advocating for a Universal pension seem to have forgotten that we had one from 1946 until 1985 when treacherous Labor introduced the asset and Income tests that effectively precluded millions of taxpayers from the pension that they had paid for. I paid 7.5% of my wage in addition to income tax for 32 years and saved a bit for my retirement as a result of which I have never received a cent from Centrelink.
    Most of you commenting on this newsletter will have been robbed in a similar way, but you seem to have forgotten.


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