Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by Peter Hogan, Head of Technical with the SMSF Association.
Peter, thanks for joining us.
Peter Hogan: Pleasure. Thank you.
Freeman: We've obviously heard a lot about the government's proposed changes to super contribution caps. Would these changes affect SMSF trustees a lot more than other super fund members?
Hogan: In itself, it shouldn't necessarily impact upon self-managed super fund trustees any more than other members or funds, in the sense that the rules apply to everyone clearly.
Perhaps it may have more of an impact upon members of self-managed super funds in that they often are people who have more money to contribute to superannuation, and perhaps they have for that reason been a little bit more vocal when the government has restricted the level of contribution that can be made to superannuation because they're perhaps more likely to make larger contributions. And that's a real generalisation. Clearly, that's not 100% of the case. It's not a case across the board.
But certainly, if you look at, for example, average account balances of members of self-managed super funds who are also trustees of their funds, they are much larger than many of the other alternative superannuation arrangements out there. That's clearly not just investment return, that's also the ability to put additional amounts of money into superannuation as well.
So, in that sense, yes, advisers of trustees of self-managed super funds are often talking and emphasising the limitations as they change, particularly when they are reduced as the government currently proposes to do from July 1, 2017.
We also feel that perhaps the reduction, particularly for the over 50s is something that might influence or have an impact upon self-managed super fund members and trustees perhaps a little more. But again, we feel that across the board many people in their 50s and early 60s, when they get closer to retirement, have a greater ability to contribute regardless of the superannuation arrangements they have.
And really, while one can understand from a budgetary perspective perhaps why the government is looking to save some costs at the budget level, that we feel that perhaps targeting the over 50s and reducing the amount of money that they can put into superannuation is a limiting factor.
Having said that, of course one of the other proposals the government has put forward is these catchup contributions to people who have less than $0.5 million inside their superannuation fund and that is the majority of people with superannuation arrangements by far. And we see that as a great positive step and perhaps it counteracts to some extent that over 50s reduction in the annual contribution as well. S
o, to the extent to which people can take advantage of those combination of changes in rules appropriately, it all comes down to getting the right advice and that's what we certainly encourage trustees and members of self-managed super funds to do.
Freeman: And just leaving aside budget 2016, what in your view is the most complex part of being an SMSF trustee?
Hogan: It is very much a case for trustees of getting a good understanding of what the rules are and what they can and can't do with the assets of the superannuation fund because clearly unlike any other superannuation arrangements a member of the self-managed super fund is also a trustee of their fund and with that comes responsibilities as trustee to manage that fund appropriately.
And it's perhaps having a full understanding of what those responsibilities entail which can cause problems for trustees of self-managed superannuation funds, if they don't seek the right sort of advice.
And in fact...I spoke earlier about increasing or hoping to increase the knowledge of trustees of super funds as our first protocol, actually emphasising what those trustee obligations are going forward and trying to make sure that there is plenty of material out there available and accessible to them for them to help them understand exactly what those responsibilities are and therefore, the implications of what that means for them when they are looking at administering and operating their self-managed superannuation fund. Clearly, very, very important as we see as an association.
Freeman: Now, Peter, do you believe that there is a lack of diversification in SMSF portfolios?
Hogan: Listen, on face value self-managed super funds can look like they are really investing in a very limited number of asset classes, it's true. I guess what the research has shown, and we recently undertook a review of about 65,000 self-managed superannuation funds really with Accurium, an actuarial firm, and we looked at those funds who were approaching or which were in pension phase, at least one member was in pension or drawdown phase, and looked to see where they invested their money and whether the fact that they are in retirement phase as such, whether that changed the way they invested their money or not and what their returns were.
And the interesting thing was that the median return, not the average return, but the median return which we felt perhaps better reflected the return of the fund, was still about 4.2 per cent for the 2015 year. The average return was a little higher than that, but that skewed of course because we have much larger funds as well as smaller funds. So, we felt the median return gave a better reflection of the true return of the average self-managed superannuation fund with the $1 million to $1.2 million fund balance.
And so, that's not a bad return ,even though these people are in pension phase, even though they perhaps tend to hold a bit more cash, they have the obligation to carry more cash to meet their pension liabilities as they fall due as well.
So, we thought that was indicative of a fairly well-rounded sort of investment return and some well-rounded investment decisions and what came out of a lot of that research was the flexibility that self-managed super fund trustees had to respond to changing economic conditions, personal fund member conditions.
There can be lots of reasons why trustees would choose to change their investments and we just saw with the self-managed super funds sector there was a great degree of, as I said, flexibility to move around between investments.
Having said that, there's two great opportunities to allow self-managed super fund trustees with the right sort of investment opportunities to diversify further, and I don't think anyone would argue that that's not a good thing.
Quite the opposite, I think that's a great thing personally and if we could move to other areas that have traditionally been difficult for self-managed super fund trustees to invest in because perhaps you needed to be a wholesale investor with anywhere from $0.5 million to $5 million as an entry investment into certain wholesale investments, it's not, clearly, in the realm of an individual self-managed superannuation fund.
Corporate bonds, there are whole number of different products and investment opportunities out there which are difficult for self-managed super fund trustees to invest in at the moment. It would be interesting to see how [ASX] mFunds go, given the managed funds have traditionally not been a popular investment with trustees.
But the fact that they now will be able to trade them on the ASX may change the view of those investments, and the investment behavior in relation to those investments. They're very new, we'll have to see how that goes. But those sort of innovations and initiatives, I think, are areas that will, I think, over time change the way self-managed super fund trustees invest their money.
Freeman: Peter, thank you very much for joining us.
Hogan: Pleasure. It's great to talk to you. Thank you.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.