The Cooper Review - Statistical Analysis of SMSFS

By Bruce Brammall

This article was first published in Eureka Report on January 13 2010.

PORTFOLIO POINT: The Cooper review of superannuation has produced probably the best, and most fascinating, statistical analysis of SMSFs yet compiled.

So, how exactly do you and your SMSF compare to the 410,000 other funds out there? Are you an average SMSF member, with a taxable income of about $92,000? Or is yours one of the 30% of SMSFs that managed a positive return in 2007-08, during what was one of the worst years for investing?

Despite the offer of help all around (including us here at Eureka Report), the duties and responsibilities that come with being a DIY super operator can be quite isolating.

Trustees are, by choice, electing to run their own super fund. They can’t have more than four members – and more than 90% have only two – so there aren’t too many trustees to consult directly with. The cost of bringing in an accountant (who can’t give investment advice) or a financial adviser for every decision would be expensive and, in some cases, self defeating – and that’s not why people get into running their own fund.

For years, people have moaned about the lack of quality of statistical data available for SMSFs. Well, finally, something reasonable is here, thanks to Jeremy Cooper’s super review.

It is, at least, the best compilation of data on SMSFs published to date, and offers trustees a guide to whether their fund is above, at or below average across a number of fields.
Cooper’s A Statistical Summary of Self-Managed Superannuation Funds covers a lot of ground, including growth in the SMSF sector, member demographics, member income, fund balances, investment performance, asset allocation, operating expenses and compliance.
Where possible, it compares SMSFs and their trustees to the rest of the super industry and their members.

For instance, SMSF assets grew at an average rate of 20% during the five years to June 2009, while the rest of the industry grew at just 8%. The average SMSF member had a taxable income of $92,000, while the average non-SMSF member earned just half that, about $47,000.

The peak earning years for Australians is between the ages of 35 and 60. The report shows that SMSF trustees between those ages earn an average of $106,000 versus about $55,000 for non-SMSF members.

The flow of contributions is weighted heavily towards SMSFs, which accounted for between 20% and 41% of all contributions during the four years of statistics. The peak of 41% was during 2006-07 when the temporary $1 million non-concessional cap was in play, as reasonable benefit limits were being removed.

To further demonstrate where SMSF contributions are coming from, during the five years to June 2008, member contributions outweighed employer contributions $3 to $1. As a result of the massive inflow of money into SMSFs, between 2004 and 2008, SMSFs moved from controlling about 20% of the super fund market to 30%. In dollar figures, SMSFs went from holding $132 billion to $332 billion.

For SMSFs, the average combined employer and member contribution for 2007-08 was $68,156, while the median was $26,475. This suggests that a large number of members used the various maximums ($100,000 and $50,000 for concessional and $150,000/$450,000 for non-concessional contributions) to help bring up the averages.

Performance

SMSFs beat larger APRA-regulated funds in the financial years ending in 2006, 2007 and 2008. SMSFs scored returns of 12.6%, 16.9% and –6.1%, while the whole of industry average was 12.2%, 13.3% and –7.8%.

It is probably no surprise that the larger SMSFs performed better than the smaller funds given some of the fixed costs (fees, accounting and audit) involved in running an SMSF. But the effect this had on returns was truly remarkable. Funds greater than $2 million outperformed those with less than $50,000 by 14–19% between 2006 and 2008.

In 2007-08, 70% of SMSFs had a negative year. In the previous two years, those figures were just 19% and 14% respectively.

Demographics

At the end of 2008-09, 23% of SMSFs had just a single member and 67.9% had two, 4.5% had three members and 4.6% four.

Two-thirds (67%) of SMSF members are aged over 50, while in other superannuation sectors, the over-50s make up just 22% of the member population. It’s even starker when you look at members over the age of 65: in SMSFs, the share is 19.4%, while in non-SMSF super it’s just 3%.

Just 5.5% of SMSF members are aged 35 or less, while that age group makes up 43% of the overall superannuation market. But in the setting up of new SMSFs, as expected, it is younger Australians who are looking to take advantage the freedom of SMSFs.

About 22% of all members in SMSFs are on a super pension, while about 27% of all SMSFs were fully or partially in pension phase.

Member balances

The differences are nowhere more obvious than in super balances. The average member balance inside SMSFs is $456,000, more than 18 times the average non-SMSF member’s balance of approximately $25,000.

The common wisdom, based on the level of costs associated with running an SMSF, has been that $200,000 should be the minimum balance to set up a fund. And the average fund size did rise considerably between 2005-06 and 2007-08. The proportion of small funds (under $200,000) fell, while mid-sized funds ($200,000 to $1 million) stayed steady and larger funds increased by proportion.

Interestingly, those who open an SMSF don’t necessarily roll all their super into it (or have some trapped in defined benefit funds). Of those who had money in both, the average balance inside the SMSF was $272,000, while they had another $78,000 in super outside their SMSF.

Operating expenses

The average cost of running an SMSF has declined by 20% between 2006 and 2008 – from 0.86% of the average balance to 0.69% – while the average for all super funds is about 1.2%. However, in dollar terms, the average operating expense cost rose from $5500 to $6500 over the same period.

Economies of scale are quite evident in the size of SMSFs. Funds with less than $50,000 tend to pay 5–6% of fund assets in expenses, while the largest super funds pay 0.36%.

Other findings

Some of the other findings do not differ at all, or differ little, from data we have covered previously in Eureka Report, including that SMSFs tend to be more overweight Australian shares and cash than APRA funds, which have higher allocations to international shares and fixed interest.

Other interesting findings include:

• 71% of SMSFs have individual trustees, while 29% have corporate trustees.
• 86% of trustees said greater control of investments was one of the reasons for setting up their fund.
• 46% said greater control was the primary reason for doing so.
• The average super fund has been in existence for eight years.
• 64% have been established for more than five years.
• 38% have been established for more than 10 years.
• Only 15% are less than two years old.
• When setting up their fund, 72% said they consulted an accountant, 42% said they consulted a financial adviser and just 3% said the consulted no professionals.
• Approved auditors qualified the accounts of 3.8% of super funds in the 2008 financial year.

The information was compiled by Cooper’s review team because there was a frustration with the lack of overall information available on SMSFs, the fastest-growing sector of the superannuation industry.

Let’s hope that someone – perhaps the taxman – picks up this ball and starts producing these results annually.

Bruce Brammall, for Eureka Report, is director of Castellan Financial Consulting and author of Debt Man Walking.