Australians can be confident that when the time comes to leave the family home and move into aged care, they will be given the appropriate support.
Fresh research explains how a lifetime income product, combined with an allocated pension, could mean those on the cusp of retiring will require much smaller superannuation balances than ASFA’s recommended targets.
Industry funds struggling as more members march into retirement
It was March 2109, and the dust was slowly settling across the banking and finance industries in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s final report being handed down one month earlier. As expected, the big banks, AMP and the advice sector were all in Commissioner Kenneth Hayne’s cross hairs.
But industry superannuation funds emerged relatively unscathed. The scandals that emerged, such as fees for no service (by 2022, addressing this issue had cost the big four banks, Macquarie Bank and AMP about $4.4 billion), were not of their doing. Making life even better for these funds was the exodus of bank-owned super products into their coffers.
While the funds celebrated, wiser heads cautioned the royal commission was no cause for triumphalism. Ian Silk (pictured), former chief executive officer of AustralianSuper, told an industry conference that there was no basis for complacency or hubris whatsoever. “Our challenge is fundamental: To be the best we can be for our members.”
Silk was right. Well, almost. In what was a well-crafted speech, he couldn’t resist the temptation to indulge in that time-honoured industry funds practice of sledging self-managed super funds (SMSFs).
On his wish list of eight thoughts for the future, he said superannuation needed a revamped SMSF sector and a full inquiry into their performance, especially regarding a minimum balance before people should be allowed to start one. He didn’t go into specifics, nor did he mention the fact that SMSFs, like industry funds, didn’t attract Hayne’s attention.
More than five years later, SMSFs have just passed $1 trillion in funds under management. There are about 1.15 million fund members, and the number of funds is about 620,000. Increasingly, younger people are enlisting, attracted by the notion of directly managing (with or without specialist advice) their retirement savings.
Two other events of note have occurred since Silk addressed the industry fund faithful. First, a landmark report by the actuarial firm Rice Warner conclusively demonstrated that SMSFs with balances of $200,000 (that’ about 86 per cent of all SMSFs) were cost competitive with APRA-regulated funds. So compelling was the evidence that ASIC later dropped its recommended minimum for SMSF establishment from $500,000 to $200,000.
Second, a 2022 research report by the University of Adelaide’s International Centre for Financial Services found that $200,000 was also the threshold where SMSFs achieved comparable investment returns with APRA-regulated funds. And on reaching a $500,000 balance, SMSFs (69 per cent of all SMSFs) outperform.
So, there it is. SMSFs are competitive on cost and performance, and neither the Cooper Review (2010) or the Murray Inquiry (2014) found them to be a systemic risk to the financial system. [The latter inquiry did recommend abolishing limited recourse borrowing arrangements, a recommendation the government chose to ignore].
It’s a different story with industry funds. While they flourished in the accumulation stage, they are now struggling as an increasing number of their members enter retirement.
Issues that have arisen recently such as the construction industry super fund, Cbus, being hit with court action by ASIC over the alleged mishandling of insurance payouts or the health and community fund, HESTA, being forced to refund members who switched between investment options, could prove a harbinger of widespread structural issues across these funds.
For decades, industry funds bemoaned the fact that most of their members didn’t engage with their superannuation. For their members, the reality was it was money that didn’t come out of their pocket, and they couldn’t access it, so it was out of sight, out of mind.
Today, a growing number do want to engage with their fund. Six-figure sums of money they can access are very much front and centre of their thinking. The problem is the funds are struggling to handle this growing demand for a far more personalised service.
The irony of this won’t be lost on SMSF members. For years the popular whipping boy of industry funds, on costs and investment returns, in particular, their performance has been exemplar.
Nowhere is this no more evident that in the decumulation phase where SMSFs have always been the industry benchmark. Perhaps it’s time the industry funds began asking how they achieve this outcome before more of their members vote with their feet and set up an SMSF as retirement beckons.
