28/04/2009

Although Federal Minister Sherry quashed a rumour going round a recent Superannuation Conference that the government was about to set minimum asset levels for SMSFs, the issue of just how much money should be in an SMSF to make it viable never seems to go away.

 

Any attempt to set such a minimum must take into account the performance of the fund as well as the cost because that performance may far outweigh any additional proportional cost.

 

Traditionally the debate has been about cost as a proportion of asset value.  Presumably (I’m not aware that they’ve ever released any research on the point) it was this consideration which prompted ASIC and the ATO in the past to talk about a figure of $200,000 as the minimum amount that should be in an SMSF. More recently the sum of $140,000 seems to have come into favour.

 

But where do these amounts come from and can they be justified?

 

If we see the main aim of the government and the regulators as being to ensure that the tax concessions enjoyed by superannuation are only available to viable forms of super that will result in the member having sufficient benefits to fund their own retirement, then it is not surprising that politicians and bureaucrats focus on ensuring that members maximise their returns and not gamble their super money in self-indulgent investments via their own private super fund. 

 

If costs are eating away at returns then the authorities want us to invest in ways to reduce cost and increase returns.  And they don’t want advisers benefitting from the SMSF strategy via a range of fees and charges – the implication being that the adviser is recommending self-managed super to their client so that the adviser will benefit from additional fees rather than that the strategy is good for the client.

 

But if you’ve had your SMSF money invested in cash in the last 18 months then you’ve done a helluva lot better than if you’d had it in a larger public offer fund (POF).  I’d love to see a regulator try to tell a DIY member that the $50,000 in their SMSF is not enough because of the additional costs of running the fund even though the return for that fund over the last 12 months has been 4% while for the same period a balanced portfolio in a POF has returned an average of minus 18.2%. $2,000 more or $9,100 less?  Now let me see.

 

It can be a little difficult to source really good figures in this area.  SMSF figures can be notoriously hard to research and the recent onset of the GFC has made comparisons difficult.  And I’m not a statistician.  But if you look at a number of different surveys and anecdotal reports a trend is clear.

 

According to University of Adelaide Professor Ralf Zurbrugg the average self managed super fund (SMSF) posted a gross loss of more than 11 per cent in the twelve months to June last year, beating the S&P/ASX 100 over the same period.  He said SMSFs had performed "quite well" against the S&P/ASX100 and the ASX All Ordinaries indices which lost 12.8 per cent and 12.12 per cent respectively.

 

Meanwhile Selecting Super, a statistical research division of the Rainmaker Group, reported that the average loss for balanced portfolios in public sector superannuation (retail funds, industry funds and government funds) was the previously mentioned minus 18.2%.  So far SMSFs ahead by 7 percentage points.

 

Over at APRA, Wilson Sy has produced a report measuring some crucial numbers in the small APRA fund (SAF) sector: less than 5 members. Over a nine year period to June 2005 he found that SAFs out-performed Non-SAF’s (ie large APRA funds) by about 2.2% per year.  Over five years to the same date he describes the out-performance as “even more marked … with the small funds performing well ahead of other institutional investors”.  Imagine that out-performance compounded over, say, 15 years.

 

So if there’s that much difference in the respective performance levels of the private and public sector funds, just how much difference is there in the cost of operating the two sectors? Sy found that the cost of running the average SAF was 1.8% per annum on an asset weighted basis.  The costs were higher for funds with less than $100,000 and broke even around the $200,000 mark (there’s that magic figure again).  But the equivalent figures for the public sector were higher: that’s right – higher.  Between 2.3% and 3.1%.

 

This flies in the face of recent media reports that showed public sector costs averaging at about 1% of asset value with SMSF costs at 1.4%.  As with all statistics, it’s always a good idea to check who’s paid for the research and what, if any, axe they might have grinding away in the background in respect of the result.

 

Whether the cost of operating an SMSF is higher or lower than a POF is only relevant if you also factor in the relative performance of the fund.  If SMSFs with small asset balances and therefore higher than average costs are nonetheless producing higher than average results then there is no detriment to the fund and none to the government’s strategy for getting people to save enough for their retirement.

 

No matter how much money is available to contribute to super, if the client wants to be actively involved in the investment of their super money (and either has or wants to acquire the appropriate knowledge to do so) then they should be encouraged to start their own SMSF with a very small amount and work actively to grow it.  High costs in the early years should not be a deterrent. 

 

For those that don’t want to be an active investor POFs are obviously more preferable.

 

It will be a sad day when a government official has the right to tell you that you can’t manage your own super money because the relative costs are too high, regardless of how well the fund performs.

 
Peter Townsend is the Principal of Townsends Business & Corporate Lawyers and Managing Director of SUPERCentral Pty Limited.  He has been advising the financial services industry for over 20 years