I am delighted to have been invited to launch the Self Managed Superannuation Member's Association.
I welcome the opportunity of talking with you about superannuation issues and how the Government is addressing them as well as the opportunity to listen to your views on these topics. Let me begin by outlining some key principles I see as critical to the superannuation system.
Compulsion and "duty of care"
Compulsion brings with it a strong "duty of care" by government.
Government, having rightly mandated that individuals save for their retirement, provides tax concessions, estimated in the latest Tax Expenditure Statement to be around $26.8 billion in 2007-08, and directs the concessional contributions of around $60 billion largely into the hands of private sector financial institutions governed by trustee entities. In late 2007, the total system contained around $1.2 trillion.
Superannuation is a form of long term savings that is not generally accessible until at least age 55. Issues such as governance, dispute resolution and compensation, safety, diversified investment and operational costs are important concerns for this Government.
It is absolutely vital in our system that trustees are well placed to minimise problems before they occur and minimise the need for regulators having to embark on sometimes onerous or intrusive oversight. Prevention is the best form of cure.
The central question for all participants in our system, regardless of their particular interest, should be: 'what is in the best interests of the member and does it maximise their retirement income?'
Self Managed Superannuation Funds
There are a number of policy areas in superannuation that are currently of interest to Government. Today I would like to touch on an area of concern that may be of particular interest to you, namely SMSF governance issues. On 14 February 2008, I announced that consultation had commenced with a range of industry organisations and practitioners about a range of matters of relevance to SMSFs.
Firstly, I note that in looking at governance issues, I am not focussed on the SMSF segment alone. This simply forms part of my broader focus on governance. The SMSF segment is a robust, important and mostly healthy area of the market.
However, Results of a recent Australian Taxation Office (ATO) survey indicate that whilst the majority of the sector is well managed, a significant minority may not be. A robust governance system is needed to ensure the security of the retirement incomes of all Australians using SMSFs.
The Government is concerned where individuals are subject to aggressive marketing, and may be persuaded to establish a SMSF without being aware of their role and responsibilities, and without appreciating the costs involved. This concern is not directed at any particular segment providing advice to the SMSF market.
Trustee responsibilities and knowledge
In the ATO survey I just mentioned, the ATO found that 21 per cent of participating trustees had a 'low to medium' or 'low' knowledge of their obligations. This suggests a need for further education for trustees.
From the same survey, the ATO also found that over 30 per cent of new trustees could not provide an explanation of the sole purpose test, and more than 15 per cent did not have an investment strategy.
Additionally, 25 per cent of trustees were unaware of the restrictions on the types of assets that can be acquired from related parties of the SMSF and approximately two-thirds of new trustees could not specify the limit on the level of in-house assets within the SMSF.
This information will help us identify risks in the population. I note that the previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities and education in 2005. However, these changes were not applied to the SMSF sector.
I am aware that some industry organisations are putting greater emphasis on training for their members. Some are introducing mandatory requirements for ongoing education. I note that SMSMA is developing a learning resource for SMSF trustees and I commend you for your initiative.
Fees and Charges
Many new SMSF trustees say that they believe running their own fund enables costs to be minimised, with the result that funds are more efficiently managed. Costs will be incurred for the establishment of the fund as well as the ongoing administration and operation of the fund. However, arguably those who wish to enter into SMSF arrangements may not be fully aware of the fees and costs incurred by an SMSF.
ASIC has been drawing attention to this issue through the FIDO website by encouraging people looking to establish their own SMSF to consider whether they will be contributing sufficient assets to produce a better result than a suitable low cost alternative fund.
As ASIC points out on its website, and has emphasised in Senate Committee hearings, the cost of setting up and complying with the rules generally means that you need $200,000 or more to put into your SMSF for it to be competitive. In comparing SMSF fees and costs by fund size, generally the smaller the asset size of the fund, the greater the ratio of operating expenses to total fund asset size.
The latest figures from ATO annual return data show that the ratio of operating expenses to total assets:
- is 10.51% for fund with assets of up to $50,000, and
- ranges from 3.55% to 2.63% for funds in asset ranges between $50,000 to $200,000.
- This ratio drops to 2.26% for funds with assets between $200,000 and $500,000.
Very worryingly, the trend from 2004 to 2006 is for an increase in the ratio of expenses across these levels, and this data is likely to understate the actual costs as it does not include all expenses, such as some non-deductible fund establishment costs.
ATO data also shows that approximately 30 per cent of SMSFs currently have less than $200,000 in assets.
The ATO states in its booklet 'DIY Super - It's your money … but not yet' that funds with low asset values can have diminished potential to generate returns due to their operational costs. Funds with low asset values may not have a sufficiently diversified portfolio of assets, subjecting members' benefits to increased risk. The ATO also advises that funds with low asset values are sometimes used for early access.
It is important that those recommending an SMSF provide effective disclosure, to ensure that those who wish to establish an SMSF are familiar with details such as the financial and time burdens and the amount of money they need in the fund to make it viable.
Penalties
The current penalty regime for SMSFs appears to limit the ATO options for addressing non-compliance.
Generally, the application of penalties for non-complying trustee behaviour comprises the imposition of civil and criminal penalties. Penalties of this nature can be costly, time-consuming and harsh.
With this in mind, should our penalty arrangements be better targeted to achieve the intended results? It should be noted that trustees are already jointly and severally liable but tax concessions apply only if they comply with their superannuation law obligations.
Conclusion
In closing, I would like to thank you for inviting me to speak today.
I would like to assure you that the Government is not just focused on the SMSF sector. To varying degrees there are matters that require examination across all sectors; industry, corporate, retail and the public sector.
I would be pleased to receive representations and suggestions from both individuals and representative organisations on any of the issues that I have raised today.
You may wish to refer to my press releases and speeches available on my website for a more complete overview of the issues in the superannuation arena that are currently of concern to the Government.
Thank you.