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Page last updated Tuesday, 15 June 2010
Self Managed Super Funds Bulletin - Issue 59: June 2010
On 29 May 2009, the Government announced a comprehensive review of Australia’s superannuation system: the Super System Review (Review).
It has been charged with examining and analysing the governance, efficiency, structure and operation of Australia’s superannuation system. The Review is focused on achieving an outcome that is in the best interests of members and which maximises retirement incomes for Australians.
On 14 December 2009, the Review Panel released an Issues Paper titled ‘Phase Three:
Structure’ calling for submissions by 19 February 2010 on a range of issues relating to Self-Managed Superannuation Funds (SMSFs) and small APRA funds (SAFs).
This Preliminary Report contains the Panel’s views on the issues raised in Phase Three insofar as they relate to SMSFs only. The Panel has done this to assist in the process of articulating and refining the recommendations that will ultimately be made to the Government. The Panel believes that there is a reasonably high degree of consensus on many of the issues if the numerous, high quality submissions received in response to the Phase Three issues paper are indicative.
The Panel also notes the Future of Financial Advice package of financial advice reforms announced by The Hon Chris Bowen MP, the Minister for Financial Services, Superannuation and Corporate Law, on 26 April 2010. The Panel believes that this SMSF Preliminary Report is consistent with the Government’s Future of Financial Advice reform package; in particular, in areas such as adviser competency and remuneration and the removal of the accountants’ licence exemption.
As a starting point, the Panel has articulated ten guiding principles that it believes should underpin the regulation of SMSFs. The principles have informed the Panel’s preliminary recommendations and could have a longer term role in guiding policy-making in the SMSF sector.
SMSFs are unique in Australia’s superannuation system in that SMSF members have effectively assumed sole responsibility for the adequacy of their retirement savings. This affects a wide range of regulatory settings that are appropriate for SMSFs.
Given that SMSF members are entirely responsible for their own decisions (principle 1), the Panel sees the ability to be genuinely self directed and self sufficient as an important feature of SMSFs. The Panel believes that trustees should not lightly be exposed to administrative and other burdens that are not directly relevant to building their retirement savings through sound investment practices.
All superannuation funds, including SMSFs, benefit from valuable tax concessions that are designed to encourage and help members to save for retirement. In addition, the government underwrites the risk of SMSF failure via the social security system. The Panel believes that this justifies some intervention in the way SMSFs are managed and that the community also has a right to a certain level of information about them. That intervention is currently reflected in a range of rules and restrictions in the SIS Act and associated regulations.
Consistent with the first three principles, trustees are not required to use a service provider when running an SMSF, other than the annual audit, which must be carried out by an approved auditor. SMSFs might also choose to use a range of other service providers (for example, administrators, platform providers and accountants) and these service providers also play an important ‘gatekeeper’ role in the SMSF sector. As a result, the Panel believes that government policies should be directed at ensuring service providers maintain a high standard of competency and compliance as part of the overall regulatory framework. Where appropriate, licensing should be used to achieve this, but only in a way that demonstrably adds value to the sector.
The Panel believes that the viability of the SMSF sector is strongly dependent on the composition of its population. An influx of trustees who were less well equipped to cope with the responsibilities and disciplines inherent in running an SMSF could lead to serious public policy concerns for the sector. Such a development could see a call for more severe regulatory restrictions on all SMSFs which would be to the detriment of all existing members and the sector as a whole. The Panel recognises that this Review could create an interest in SMSFs from people who would, in fact, be better off remaining in an APRA regulated fund.
The Panel therefore favours a mechanism that allows new entrants to the SMSF sector to assess whether they would be suited to its unique features and responsibilities and understand the need for a certain size of fund to make an SMSF cost competitive with an account in an APRA regulated fund. The Panel has not made any preliminary recommendation, but decided to leave open for further discussion the way this could be achieved by proposing a number of options. The various options it has looked at are canvassed in section 7.2.1 ‘SMSF Establishment – gatekeeper mechanism’.
The Panel believes that the norm should be that all superannuation funds are treated in the same way. For example, notwithstanding that outcomes might differ because of fund size, scale and other individual fund circumstances, the same tax legislation, sole purpose and preservation rules should apply across all sectors. This suggests that many rules for SMSFs will be the same as those applicable to APRA regulated funds and that is in fact the case.
However, there is no escaping the fact that SMSFs are different and that they call for different rules in a number of areas. It is not always appropriate or desirable that all superannuation funds should operate under precisely the same legislative framework. The Panel recognises that this runs counter to many submissions that argued their particular position on the basis of a ‘level playing field’. However, the Panel has specifically taken the view that consistency with APRA regulated funds will not always be appropriate for SMSFs.
This position also reflects the distinct supervisory approach necessarily applied by the ATO and APRA to their respective superannuation populations.
Extending principle 6, the Panel recognises that the SMSF environment creates some particular tensions in appropriately managing the personal preferences and lifestyle choices of the members (and their related entities). While trustee decisions for all funds are made within the framework of the sole purpose test, the Panel believes that it is appropriate to impose some additional restrictions on SMSF trustees (over and above the restrictions imposed on funds with an external trustee) given those tensions.
Leverage should not be a core focus for SMSFs. While views will differ on this issue, the Panel believes that there is room for leverage in SMSFs, but it should be ancillary to the main strategies employed to build retirement savings over the longer term.
An important element in the supervision of APRA regulated funds is ensuring that trustees are acting in members’ best interests at all times.
In the Panel’s view, a different regulatory focus is appropriate for SMSFs. The role of the regulator and key industry participants (such as auditors) for this sector should be legislative compliance, rather than a prudential objective.
Given that SMSFs are widely dispersed and non-institutionalised, and that many SMSF service providers are also fragmented and lack scale, there is a challenge for the sector in investing in improvements such as technology, governance and investor education.
The Panel believes that a sector that has such a large proportion of Australia’s retirement savings needs an aggressive agenda aimed at pursuing excellence across all its activities.
The Panel believes that it might be worthwhile for government to consider measures to support, promote and champion the development of best practice among SMSF trustees.
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