As we progress (albeit slowly) towards industry reforms with the superannuation sector, it is somewhat timely that the Australian Taxation Office has released their latest statistical overview of the SMSF industry, providing details of the 2009-10 financial year. This statistical report now in its third year of data was first published as part of the Super System Review by Jeremy Cooper, which debunked many of the myths surrounding SMSFs and demonstrated that the industry as a whole was fairly robust and well-managed.
Download the ATO’s Self-managed superannuation funds: A statistical overview 2009-10.
Many of the statistics regarding the growth of the SMSF industry are now well-known as the sector appears to grow from strength to strength. The more pertinent data when reading this review is the impact of Government policy, ongoing consumer confidence in financial markets (and Government), the important role of advice and specialisation within the sector. Much of what I discuss below focus on these key themes.
The impact of Government Policy
SMSFs were arguably the biggest loser from the Labor Government’s decision to halve the concessional contribution cap in 2009-10. Not only were contribution inflows impacted, but it most probably SMSF members who were hit the most in the significant rise of excess contributions tax assessments for the financial year as well (up 296% on the previous year).
The need for greater certainty with concessional contributions is important for the sector going forward. With the transitional period for those 50 years of age and over ending at 30 June 2012, these individuals need clear direction from Government about planning contributions for 2012-13.
The demise of the corporate trustee
The continued growth in the use of individual trustees is a concern, with 90.13% of all new SMSFs established with individual trustees in 2009-10. Unfortunately, this alarming trend has probably arisen from the highly competitive nature of the SMSF administration/accounting market. With some administrators offering free SMSF establishments, this enticement to the market appears to be coming at a cost: the cost of advice! Individuals appears to continue to setup SMSFs without knowing or understanding the differences/limitations in the different trustee structures.
It was acknowledged by the Cooper Review Panel that a corporate trustee was a far superior trustee structure, so it staggers me why individual trustees continue to grow.
Pension Phase
It is very apparent from the statistics that a growing proportion of SMSF members are moving to retirement phase. 55.7% of all SMSF members are now at an age (55 years and above) where they could draw an income stream from their SMSF, whether as an Account Based Pension (ABP) or Transition to Retirement Income Stream (TRIS). The statistics show that 34% of SMSFs are paying a pension to at least one member; even more interesting is that this proportion of SMSFs actually represent 52% of all fund assets. This would account for a significant amount of tax revenue (and growing) forfeited by Government due to policy in providing tax exemption within pension phase. Add to this, tax-free pension payments from age 60, you must wonder about the longevity of the current policy with retirement incomes.
Whilst the statistics have traditionally had members being within the SMSF system for anywhere up to five years prior to drawing an income stream, this trend is shifting, with many new SMSF entrants commencing the payment of pensions in the first year of existence.
The growth in the payment of pensions is seeing the ATO take a greater interest in the area across several fronts including education and enforcement. A new ATO publication on SMSF pensions (due out in July 2012), the finalisation of TR 2011/D3 (April 2012), and a focus on Exempt Current Pension Income (ECPI) with the 2011-12 compliance program, means we will expect more and more activity from the Regulator in this space.
Asset ranges & fees
They say that “size does matter”… although its not always the determining factor when it comes to SMSFs. There is however a trend showing a reduction in lower account balances and growth in higher account balances. It appears that education and the role of advice may be playing a role in people deciding to set up SMSFs.
The average expense ratio within SMSFs continues to decline, down to 0.54% in 2010 from 0.69% in 2008. However, this is likely to be distorted by the growing number of SMSFs moving to pension phase where deductions are required to be proportionately reduced by the exempt income percentage applicable to the fund. This issue has been recognised by the ATO, with changes expected to the SMSF Annual Return to capture both deductible and non-deductible expenses.
As the industry grows however and technology plays a greater role, we will continue to see the operating costs of SMSFs go down. Due to the typically lower volumes of SMSFs per tax agent, the industry does appear to have a very slow uptake in technology advancements to become more efficient. The statistics also show progressive decreases in SMSF auditor fees, a reflection of a growing number of specialist auditors starting to build streamlined and efficient businesses to handle high volumes of audits each year.
SMSF Assets
Interesting to note that the number of SMSFs with more than $1 million of assets has grown from 19% in 2006 to 26.7% in 2010. The industry continues to see many new SMSF entrants coming from industry and retails funds with sizeable balances. Even with volatile global financial markets during this time, SMSFs have continued to build their average and median total assets.
Investment Performance
The traditionally high proportion of cash and deposits held by SMSFs augured well during the GFC, however in a year where markets bounced back positively, the SMSF industry was generally outperformed by APRA regulated funds. See comparison table below for 2008, 2009 and 2010 financial years between SMSFs & APRA regulated funds:
When looking at the Return on Assets (“ROA”) for the 2010 financial year where markets rebounded, the rate of return achieved on average per SMSF increased progressively across the asset-range bands, with 8.90% achieved on average for funds with greater than $2 million. This compared with a -8.64% average ROA for balances under $50k. This can be seen in the chart below:
In my view, the statistics reflect an an emerging industry, with some areas of compliance still a concern as with a greater need for competency across professional services including financial advice, accounting and the approved auditor functions. With both the Future of Financial Advice (“FOFA”) and Stronger reforms intending to impact the quality of advice and competency requirements for these industries, I think it will be fair to say the landscape will look significantly different when reviewing the statistical summary in 5 and 10 year’s time.
For SMSF trustees, these statistics and the recent SPAA/Russell SMSF survey highlight a lack of confidence in current market conditions and also in the ever-changing nature of Government policy with superannuation. In addition, a focus on mainstream media for advice (52% of respondents in SPAA/Russell survey), means many people may end up like a “deer in headlights” if issues arise through the lack of advice.
However, I do think it is an exciting time for the SMSF industry, and these statistics continue to prove it…