In episode 33 of the Smarter SMSF podcast, Aaron is joined by Kevin Bungard, CEO of Class Limited to discuss the release of the December 2017 – Class SMSF Benchmark Report which explores the topic of pensions and whether they match their SMSF stereotype.
With pension-paying funds now representing half of the SMSF sector today, the characteristics vary significantly from the average and median data typically outlined by the ATO each year in their SMSF statistical overview. Aaron and Kevin discuss some of the insights from the report, including areas for practitioners to be focused on and how these fund’s act and operate differently from those SMSFs with a far younger member profile.
In the podcast, Aaron and Kevin also talk about the value of what this data is telling us and why it is so critical today in helping to shape the conversation of the SMSF industry with policy settings into the future – in particular with the creation of the SMSF Association’s think tank created in conjunction with the Regulator and several foundation members.
Subscribe via iTunes | Subscribe via Podbean
Transcript
Intro:
Welcome to the Smarter SMSF podcast, the show where we discuss the latest insights, ideas, and strategies with self-managed super funds, all designed to help make smarted decisions, and equip you to be at the top of your game. I’m your host Aaron Dunn.
Aaron Dunn:
Hi everyone, and welcome to this week’s podcast. Aaron Dunn here, and today we are going to be looking at the recent release of the SMSF Benchmark report for December of 2017 released by Class, and today we have Kevin Bungard, CEO of Class Limited, who’ll be discussing with me, the latest report on due pensions, or SMSF pension funds match their stereotypes. So, thanks for joining me today Kevin.
Kevin Bungard:
Oh, thank you for having me on board, I love chatting about the benchmark reports, and my pleasure.
Aaron Dunn:
Thank you, and I guess on of the real interesting things, that comes out of these reports, is that it allows the industry to flesh out some of the issues, that statistically, we’ve only ever been able to see from the ATO on an annual basis. And, the first question to you is around, you know, pension funds represent about half of all SMSFs within the sector today, and as a result the characteristics that define these SMSFs, vary significantly to the averages and mediums we see ordinarily published by the Regulator each year, in their statistical overview. So, what were some of the findings or insights, that you can share out of this December 2017 quarterly report?
Kevin Bungard:
Yeah, as you say, I think the interesting thing about a lot of the data that gets reported about SMSFs is its averages, and I think the averages can hide a lot of variation, and one of the surprising things was the difference between the pension balances and the accumulation balances. It’s not entirely surprising, but I think that the magnitude of the difference, between those that are in accumulation phase, where there’s nobody in the fund that’s currently in a pension phase. About $773,000 was the average there, and then the average on the pension side, it’s just nudging, just under $2,000,000.
Kevin Bungard:
Anyone who went to the SMSF conference last week will know that, that starts to raise some interesting questions about estate planning, and so it’s kind of interesting in terms of a number, or average member funds, with two members. There’s a whole bunch of other data about the kind of asset classes, and where the pension funds are investing, which I’m sure we’ll get a chance to chat through as well.
Aaron Dunn:
Yes, so your right. In terms of the estate planning issue it’s certainly been arguably the most interesting and topical issue when it comes to these reforms, because of course we have our transfer balance cap that a person needs to comply with. Now we have a pension paying fund here with a balance of $1.4 million dollars. If the typical fund is about, according to the ATO, is about 1.9 members per fund, this is clearly going to be highlighting some significant estate planning issues around a member having to reduce balances back to the 1.6 million dollar transfer balance cap in the event of a member.
Aaron Dunn:
You touched on briefly I guess there some of those issues, but what do you see as the things that practitioners need to be focusing on given this statistical amount that is clearly higher than the transfer balance account when we think about succession inside a fund?
Kevin Bungard:
I think it’s really interesting that at the conference last week the discussions about estate planning and dealing with a particularly pensions and how they work in that situation where it’s sort of reverting to the surviving member. It’s interesting with dealing with that now, I think. We’ve literally reached the kind of I guess, we dealt with all the upfront stuff we needed to deal with for the super reform and we’re now literally dealing with the tail end piece in terms of the estate planning and what happens when a member dies.
Kevin Bungard:
And, the challenges there, I think, are quite complicated depending on the structure of the type of pensions that you have and so forth. And, some of that still being worked out, so there’s still a lot of work to be done. But, I think that number is kind of interesting in kind of highlighting the amount of work that probably the industry needs to be doing to make sure that they are getting in place the appropriate strategies, and figuring out exactly what they’re going to do with those pensions, what they’re going to do if they have to roll amounts back. Do they need to make room on the pension caps as we discussed in an earlier report? And, so I think the importance of some of those strategies, both in terms of estate planning and managing your caps and limits and managing the types of pensions and whether there’s restrictions around what you can do with the death benefit pension. And, there’s more stringent restrictions about what you can do if it’s a tryst, for example. Or, was it previously and is now a retirement phase.
Kevin Bungard:
It’s a very complex question, sir, that really I think the industry is only just getting to grips now, because we’ve been so busy with all the stuff we had to do leading up to this point that now that’s kind of the next area that people need to focus on.
Aaron Dunn:
Yeah, and I think that was something I observed, and I spoke about this in my last podcast. I did a three key take aways in my last podcast from the SMSF association conference. And, I think there was a very linear approach to learning last year where now that it’s chiselled into our mind, we can start to think a little bit more laterally around some of these issues. And, like you said, in there we touched on a couple of quarters ago when we spoke about one of the reports about the concepts about wanting to call back amounts against the transfer balance cap where a client is taking up more than the minimum pension.
Aaron Dunn:
I know within our membership platform, we’ve now built out a lot of the documentation that now needs to be done around that when we consider the practical compliance guidance the commissioner gave us to deal with commutation in the late up to 30 June. We built additional paperwork that sort of insures that we have a valid commutation in play. And so, it’s all those things on top of the fact that we’ve got some nuances between legacy pensions, and death benefit pensions, and what we can do. It certainly is an area that we’re going to have to spend a lot more time on and really talk to our clients and make these top of mind as we work through and still work through many of these reform issues.
Kevin Bungard:
It’s very important I think that it’s not just a matter of administrative understating what needs to be done, it’s that communication, that education. Putting the right documentation under guidance from the ATO has been very clear on that, that you’re expected to get that in place. If you’re not on top of your game here, your clients are going to miss out.
Aaron Dunn:
One of the things that in the session I spoke at the conference that I had David Busoli and Adam Goldstien was about, which I think is quite interesting as we work through some of these issues is that Adam made the comment that, “A compliance kind of becomes the new strategy.” You mentioned it just then. There are a lot of things that we need to go through and having this information readily available in terms of having your data current and using integrations and so forth to ensure that you can have these conversations with clients in a timely manner is now gonna become more important than ever. I’m interested in your thoughts on that.
Kevin Bungard:
I agree totally. I think that we’re in a situation now where the caps and the limits and the regulatory regime are all set up to basically say that you need to have the information at your fingertips if you are going to work with your clients and get the most effective outcome for them. I think in your station you’re talking about whether you’re thriving or surviving and I think if you’re aiming to thrive in this environment you’ve got to embrace that. You’ve got to realise that that’s the new normal is having information at your fingertips. You can’t be trying to set strategy looking in a rear view mirror. It’s not going to work.
Aaron Dunn:
Absolutely. The Benchmark Report, of course, also shared some valuable insights into how pension funds are investing in terms of their defensive investments versus more aggressive investments and so forth. And, what it did show was how different they are to a younger profile, which is a good thing, of course, when we think about I guess the time horizons for investment and so forth. And, the types of investments that they can pursue. Cane I get you to maybe elaborate around what some of those findings were in this quarterly report?
Kevin Bungard:
Yeah, there were a number of areas where again and most of these things are just kind of fitted the pattern that we were kind of expecting, but in some cases, dramatically so. Look at LRBAs for example. It’s the sort of thing where you’d expect that it’s somebody in accumulation looking to get some leverage to help build their balance, and if undertaking advantage of those, you’d expect it to be those funds. And, it was dramatically so with 7.8 percent of the holding if it was an accumulation fund looking to … Sorry, 7.8 percent of funds having some level of LRBA in them, where it’s only 0.6 if they’re in the pension phase. And keeping in mind, some of those pensions we’ve set pension phase funds where anyone was in pension. You may have still had a member in there who was in accumulation
Kevin Bungard:
Yeah. But, dramatic difference in terms of certainly that leveraging, and the use of LRBAs.
Kevin Bungard:
But, then even looking at other areas like property investment where again typically there’s been a lot of stories about SMSFdriving property prices, which we’ve kind of addressed in the past. But, the other thing again is property is obviously a long term investment. It’s not something that you want to get in and out of quickly. It’s good to see again that accumulation funds that tend to be more focused on that and particularly residential.
Kevin Bungard:
In the case of residential property, it’s as if pension funds, only about five percent are investing in a residential, so they’ve got a preference commercial or rural property, rather than that residential property. And, that’s nearly a third of, about 14 percent of accumulation phase funds that are looking at that asset part.
Aaron Dunn:
And, I think, I was just going to say that you raise a couple of really important point there that regular data is now providing us and I guess this is now important for the industry in terms of how we continue to dispel some of the myths and I guess, the ATOs data has been really valuable in terms of the statistical overview. To be able to drill down at a far greater level gives not only Class and its users, but the industry even more insight that enables us to start to dictate and advocate policy and the way in which the sector will continue to operate and hopefully thrive into the future.
Aaron Dunn:
And, I know Class is one of the initial parties to the new SMSF Association think tanks. I’ll be interested in your thoughts around why this data is some important now and is critical to breaking down the real story of what’s happening inside of SMSF.
Kevin Bungard:
One of the reasons we started the Benchmark Report was we were concerned about the quality of the data, and there was lots of debate going on in the industry about what was happening with SMSF. And, having that ATO data in aggregate is great for seeing across the industry what’s happening, but because it’s based on annual return data, there’s actually a lot of rejection. If you read the methodology and how they go about doing what they’re doing. Particularly, things like property where they talk about the closure that there is in property, it’s based on potentially data that could be a year or two out of date.
Kevin Bungard:
But then, there also then projecting that forward based on things like when they look at managed funds they use benchmarks to assume the growth and the assets for those. And, if those terms that you’re investing in domestic shares and property. But, that’s an assumption because the ATO can’t look through to see what types of managed funds you’re holding. We thought that was really important to be able to address things like how much exposure is a SMSF really getting to international and what are they really doing around some of the other asset classes and things like LICs and ETFs, their use, the growth of that, which is not immediately obvious from the ATO data. We think that that’s important that we get that information.
Kevin Bungard:
We’ve worked with the association in the past where they’ve been trying to participate in policy discussions and so forth and helped provide data for what they’re doing. And, the think tank being able to engage directly with ATO around what we’re doing and where the concerns are and what sorts of things the industry needs to be doing realistically. It is fantastic in terms of getting minds together and agreeing on what we feel needs to be addressed within the industry at that level.
Aaron Dunn:
That’s good, so I guess in closing if there’s any final comments that you’d like to make from the report, and most importantly where people can access the SMSF Benchmark Report and find out more about Class.
Kevin Bungard:
Yeah. Look, there’s a bit more detail in the report about the income and the fact that there’s still a high level of domestic equities being held. And you know, we put that down to that serotype off the self-managed funds looking for that dividend yield and the franking credits that they need to then pay pensions out of. You know, that’s a clear sort of pattern that we are seeing there, but I think there is also some other good information in there in terms of the broader sort of asset class that’s used as debt security and other things that can be looked at in the report.
Kevin Bungard:
And again, I would remind your listeners, if you have any questions, if there’s things that you want to see us do with the data then we are always keen to have suggestions about what sorts of things we should have next. And, are there areas of interest, because we want it to be topical. We want it to be kind of engaging and really drive some interest across the industry in terms of what’s happening.
Aaron Dunn:
Very good.
Kevin Bungard:
In terms of where to get the report, you can go to class.com.au and there’s a link there that’ll take you straight through to get to the insights and ideas and from there you can download not just this latest report, but all the earlier reports. If you do want to look at the areas we were talking about like the contributions including and commutations as a result of the super reform. You can see that in the older reports, as well.
Aaron Dunn:
Excellent, well thank you once again, Kevin. I know you’re a busy man, but you do openly make yourself available to these podcasts so it is very much appreciated. Thank you to everyone for joining me today. I look forward to you joining me for next week’s podcast. Thank you, Kevin. Very much appreciate it once again.
Kevin Bungard:
Thank you, Aaron.
Aaron Dunn:
Have a great day, everyone, and I look forward to you joining me for next week’s podcast. Bye, for now.
Aaron Dunn:
Thanks for joining me today on the Smarter SMSF Podcast. That was a smart move. If you’d like to find out more about today’s topic, you can add a comment either at our website, smartersmsf.com or our Facebook page or using our Twitter handle @smartersmsf.
