The “Peak SMSF” theory

PORTFOLIO POINT: Has your interest in DIY super peaked? A major study believes this is as popular as it gets for SMSF investing.

“Investors’ inclination to run their own self-managed super funds has peaked. Over the next 15 years, SMSF growth by numbers and assets will slow. While they will double in size in assets being controlled, their market share has topped out and will slip from here.”

By even suggesting this to a Eureka Report audience, I fear that I risk being tarred and feathered as a heretic. So I’d like to stress that today’s column does not necessarily reflect my own beliefs. They are the conclusions of a study by a highly regarded, independent, consulting group, Rice Warner Actuaries.

Despite what trustees might want, Australia’s superannuation industry does not stand still for any length of time. It’s permanently, and somewhat frustratingly, on edge, shifting its balance from one foot to the other as it wanders around the room. The landscape of 10 years ago bears almost no resemblance to where the industry is today.

And if you believe Rice Warner Actuaries, there’s another quantum leap or two to come.

RWA has just published a very interesting set of predictions, suggesting who the winners and losers might be over two time periods – five years and 15 years – in their “Superannuation Market Projections” report for 2009.

It is not bad news for the SMSF industry and its trustees. But RWA simply argues a case that SMSF investing is not everyone’s cup of tea. Every growth cycle must have a peak. And they suggest that the big spurt for DIY super is now in the past. Fair enough. Being strongly involved in running your own retirement asset investment portfolio, like running your own business, is not a tea party. And there are plenty of people who will wind up their funds when they realise this.

One of the comments made around this report was that there are many husband and wife funds where only one member really has any interest in doing the work involved in running an SMSF. What happens when that person dies? How likely is it that the other person will want to keep the SMSF open? Should he or she? In many cases, the answer will be no, as it would be far more expensive and time consuming – even with the help of advisers – to run a SMSF.

What RWA is predicting is the medium to long-term future of the five different types of superannuation funds in Australia. Those five are corporate, industry, public sector (government), retail (commercial) and SMSFs.

RWA suggests that corporate super will extend the recent consolidation/exit phase and will be close to being wiped out within 15 years. Only super large funds will continue (such as Telstra). Their current market share of 5.6% will fall to 2.9% in five years (June 2014) and just 0.4% in 15 years (June 2024).

Already, over the last 10 years, the number of corporate funds has dropped by more than 95%.

Government, or public sector, funds are also in long-term decline. Their market share will fall from 13.5% to 13% to 8.9% over the next 5 and 15 years. Their future is assured, however, because they are the government and they’re unlikely to shirk their responsibility completely.

That leaves industry, retail and SMSFs.

Industry funds will continue to be the big winners, RWA believes. Their market share will grow from 17.7% now to 23% in five years to 29% in 15 years. A star that’s still on the rise.

Retail funds – those backed significantly by financial advisers – are currently the largest portion of the advice market. They hold 32.3%, but this is predicted to rise to 34.7%, then 37.2%.

And that leaves SMSFs, which currently number around 410,000.

SMSFs currently hold second place to retail funds with a market share of 30.9% of assets. RWA predicts this will slide to 26.3% in 2014 and 24.5% in 2024, RWA claims, relegating them to third behind retail and industry funds.

Of the total money inside super, the amount sitting in pension accounts will rise dramatically as the Baby Boomers age. The “post-retirement segment” will increase from $214 billion now, to $391.6 billion in 2014. But by 2024, it will have quadrupled from 2009 levels to $949.2 billion.

RWA claims that while most of this money currently sits in retail funds, who have always had the annuity products available, all funds (particularly industry funds) will develop their own post-retirement products to offer to members and customers.

In other findings in RWA’s report:

• Total super fund growth over the next five years will be at about 8% compound, which will see the super system worth around $1.583 trillion in June 2014.
• Slightly slower average growth of  6.34% over the 15 years to June 2024 will see total super balances at $2.726 trillion.
• Average account balances, in 2009 dollars, are expected to grow from $62,600 now, to $78,000 in 2014, to $92,900 in 2019 and $108,000 in 2024.

(All figures are in 2009 dollars.)

But if you want a figure that shows the real strength of the SMSF industry, it’s these current average member balances in RWA’s report.

SMSFs are here to stay. There’s no doubt about that. And, so long as it can act cohesively as a group for the purpose of lobbying, it should be a part of Australia’s superannuation industry that thrives.

Bruce Brammall is the author of Debt Man Walking and director of Castellan Financial Consulting.