(03) 9020 2905The unconstrained growth of self-managed super funds is about to come to a stunning, but natural, end, according to respected research group Rice Warner Actuaries.
The prediction follows a period of a phenomenal numerical increase, which has seen the number of SMSFs surge toward the 400,000 mark, and which may simply imply a return to more regular interest in DIY management.
The Federal Government has made noises that it believes that slowing the flow would be a good thing. It is felt that there are too many uneducated trustees out there paying too much of their retirement savings in fees and charges.
But Rice Warner Actuaries’ most recent report claims that the growth will slow naturally, with a substantial portion of that decrease occurring over the next five years. The amount of money ploughed into SMSFs will slow, RWA claims, as a percentage of the overall funds flow into super. And the obvious conclusion to draw from their data is that people will turn back to less complicated super structures, such as industry and retail super funds.
RWA’s actual prediction is that the amount of money invested through DIY super will fall as a percentage of the total invested across the superannuation hemisphere.
UsingJune 30 2008as the cut-off date, RWA says that SMSFs held approximately 30.9% of the $1.173 trillion in superannuation inAustralia. Over the next 5, 10 and 15 years, RWA estimates the amount of money in super will grow to $1.87 trillion, $3.09 trillion and $4.77 trillion respectively.
However, the percentage of that wealth sitting in SMSFs will fall to 27.9%, 26.8% and 26.2%. The biggest portion of the falls, the group believes, will happen in the first five of those 15 years.
It’s not that they are predicting SMSFs to fade away. Just that they will grow more slowly than some other sectors of the industry. Asset growth in self managed super will still be 8.6%, RWA claims.
RWA’s figures are based on their expertise in the superannuation industry, but more specifically on data from three million super accounts and summarised information from funds which in total have more than six million individual accounts.
It predicts that corporate super funds – funds run by employer groups themselves – will be all but dead in 15 years. At an increasing rate, employers have been passing on responsibility for investing and monitoring of these funds to larger professional managers. It’s one of those “not our core competency” issues.
No surprise that RWA has predicted low-cost industry funds will continue to grow furiously. Their share of the market is expected to lift from 19% of all monies now to 25.7% of the total pie in 2023, giving them a compound annual growth rate of 12 per cent.
Only two other parts of the industry are likely to grow faster. Employer master trusts are tipped to have annual asset growth rate of 14.9%, while “post retirement products” are expected to grow at 16.7%, as those who find themselves in drawdown from other funds often have to find themselves moving to retail funds.
RWA’s figures on the change in the makeup of the industry over the last 10 years are just as fascinating. Since mid-1998, the total number of corporate funds has fallen from 3898 to 228, a fall of 94.2%. The number of industry funds has fallen by 58%, from 173 to 73 and the number of public sector funds is now just 39, down from 75.
Retail funds have also seen considerable consolidation, with the number falling from 328 to 174, a drop of 47%.
But self-managed super funds? No, they’re growing like weeds, as Australians have become more educated about investment. The number of DIY funds has increased from 173,116 to 393,610. That’s an increase of 127%
All in all, a very interesting and highly readable report intoAustralia’s current superannuation system. It could not contrast more starkly with “Australia’s Future Tax System – Retirement Income Consultation Paper”, which TreasurySecretaryKenHenryis getting the credit for.
If your alarm was set forTreasury SecretaryKenHenryto drop a Costello-style “tax-free for the over-60s” bombshell for the next shakeup forAustralia’s superannuation system … hit the snooze button and try again in a year. (You might not have even noticed it in the papers last week.) However, you might simply not have noticed the alarm going off at all.
The report, which is still a year off being “final”, is more about laying down the groundwork for whereAustralia’s current superannuation system is than saying in what direction the government ought to go in making big picture improvements.
It sets out both sides of the argument for every point it raises, including the costs and benefits of raising compulsory superannuation contributions beyond the current 9%, towards 12% or 15%, without laying down an opinion.
The overall tax report, of which the retirement income streams paper is a part, has so far received 500 submissions and is taking a softly, softly approach (as I would too if I had to work my way through that many submissions). There’s no hurry to make a decision here. No need to be too specific either: super tax concessions costAustraliasomewhere between $4.6 billion and $26 billion a year.
It points out that the cost of raising the level of super contributions from 9 to 12 or 15% is a double-edged sword –- people won’t receive it to spend now. They’ll either have to give it up in wages growth from their employer, or give it up personally in watching it being sent straight from their paypacket to superannuation.
There are no great surprises in some other findings, such as the questioning over whether or not the government age pension is sufficient. It trots out an unsurprising statistic that the top 5% of Australians gain approximately 37% of the tax concessions on superannuation.
One of the few ‘headlines’ to come out of the report was the vague suggestion that banning super lump sum payments could be a good idea, in favour of forcing more Australians into more sustainable allocated pension income streams.
But the bridge for the water to pass under is a long way from being built.
Bruce Brammall is a financial adviser and author of Debt Man Walking – A 10-Step Investment and Gearing Guide for Generation X.