As part of the Super System final report delivered a decade ago (yes, 30 June 2010), the panel in their recommendation to Government articulated a vision and a number of policy principles that should apply to the super system as a whole, but also specifically to the SMSF sector. In addition, the panel identified that SMSFs have a unique set of characteristics that make them different and as a result established a set of ten guiding principles that the panel believed should underpin the regulation of SMSFs specifically.
Whilst not enshrined in legislation, the vision set and guiding principles have been an effective tool to assist in policy design for SMSFs over the past decade.
I’ve recently been enjoying reading the new book by Simon Sinek, The Infinite Game, a story that distinguishes finite and infinite games that exist all around us. This resonated with me in the context of the super industry and in particular the infinite game that exists within the policy and regulatory framework. That is, the players come and go (think politicians), the rules are changeable (regularly with super policy) and there is no defined endpoint. Ultimately, in an infinite game there are no winners and losers, there’s only ahead and behind.
This got me thinking as we start off a new decade about a couple of key questions:
- Is the vision set for SMSFs still relevant today; and
- Do the guiding principles still ring true for the SMSF sector leading into a new decade?
In this first blog post (1 of 2), I’m going to focus on the panel’s vision set for SMSFs (the ‘infinite game’) and whether it is still relevant today as we head into a new decade.
Vision for SMSFs
The Panel set a vision for SMSFs, one where:
- trustees act diligently to build their retirement savings and are supported by highly competent and skilled service providers; and approved auditors and financial advisers have a greater ‘gate keeping’ role to ensure that those in the SMSF sector are more likely to be able to cope with its challenges;
- the sector is able to innovate quickly, is efficient, well‐managed and largely free of asset‐based or percentage fees;
- SMSFs are simpler for trustees to operate and manage; operating costs continue to decline through improved efficiency, greater use of technology and less reliance on paper‐based accounting approaches; and SMSFs are subject to more effective regulation and better governance;
- trustees are supported with access to information that is relevant, reliable and comparable, enabling the costs of running SMSFs to be known, comparisons with other forms of superannuation to be performed and facilitating better decision‐making;
- trustees are focused on investing for their retirement and not on related party or present day benefits; and
- SMSFs are safer, as the risk of illegal schemes and fraud have been mitigated.
Let’s explore each of these in more detail and assess whether they are calibrated correctly moving into the decade ahead:
Roles & responsibilities
When reviewing the recommendations of the panel in light of where we are today, I can see a further reshaping of advice to SMSF trustees, expanding the role of professionals as ‘gate keepers’ and higher barriers to entry for trustees in the decade ahead. Let’s take a look at these areas in more detail…
Whilst new SMSFs over the past couple of years has seen a level of decline, it will be unlikely that this will continue long term. It’s not that we will see any explosion of new establishments, but with the Generation X demographic (mid 1960’s to early 1980’s) for the first time in this decade reaching age preservation age, the desires of greater engagement and control through SMSFs will continue as primary drivers for growth.
What is becoming more clear is the Regulator’s desire to play a greater role in the education of new entrants as SMSF trustees. Over the past decade, there has been a focus on better education of trustees, including administrative powers for the Commissioner to enforce educative directions (although not used anywhere near to the extent that it probably should be). Where the focus has been on increasing standards within the advice space (and rightly so), the ATO can look to use mandatory training as a mechanism to not only increase trustee knowledge towards their roles and responsibilities, but also use as a tool to help further mitigate fraudulent activity within the sector. It’s a live issue today and suspect as we move through the decade that the path to entry will look somewhat different for trustees.
You can raise a pretty strong argument that the licensing framework implemented over the past decade to support trustees has not achieved the objectives set by Government to increase advice, in particular in light of the limited licensing framework for accountants and tax adviser registration for financial planners.
As we move forward, this train has already left the station to try and come up with a better resolution for consumers and the industry. It comes as a collaborative approach taken by the joint accounting bodies, the SMSF Association, and FPA Australia towards a more consumer centric framework. This is important, because regulation driven by the sector should result in better outcomes than these driven by Regulators.
The Productivity Commission (PC) went a step further recommending those providing advice to SMSFs, must be suitably skilled to do so – this goes directly to the vision of skilled and competent service providers. I can see in the next decade, a greater focus on service providers needing to demonstrate a higher level of competency to support trustees. This goes beyond just advice, where I can foresee accountants & administrators having to require greater levels of competency (or regulation) to meet the demands of SMSF clients. I spoke about this matter in my opening remarks in our last Future of SMSF report.
With succession becoming a sleeping giant for the SMSF sector (1 in 5 individuals aged 70 years or older, holding 30% [or $217 billion] of total fund assets), the need for SMSF specialisation to become a profession is now more apparent than ever before.
Overall, this setting is correct for the vision, with diligently acting trustees, supported by highly skilled and competent SMSF professionals.
As an industry, we have seen the SMSF sector move ahead in ‘leaps and bounds’ from an innovation perspective. To think that a decade ago, cloud-technology was in its infancy – Class Super was an early product, Simple Fund 360 didn’t exist (nor SuperMate), yet hear we are today with nearly 70% of all SMSFs now having administration, compliance and portfolio management functions done online.
As an industry, we have been fortunate as professionals, with software being the great equaliser – in some industries, players exist with huge competitive advantages, but for those embracing the level of innovation that we are seeing today, are not only remaining relevant, but are reshaping their business model to meet the changing needs of SMSF clients today.
In many respects, we are only starting to understand the impact of what this type of innovation can do for the SMSF sector. The decade ahead shapes as the most defining that I’ve seen in my 20+ years working with trustees and professionals alike. Which is why with this type of innovation that the focus on minimum balance thresholds is flawed. The pace at which such innovation is being created will see younger entrants, with lower balances enter the SMSF market. ASIC shouldn’t be pinning themselves (i.e. publish) to static figures that are quickly outdated and not representative of actual fees in the sector (using averages, not medians as a start!).
Overall, we must CONTINUE to foster innovation that allows higher levels of engagement and a highly efficient sector.
Efficiency & effectiveness
Leaning on some of my comments from the previous section on innovation, we are seeing management of SMSFs becoming simpler (that is of course unless the Government changes the rules!). I see SMSFs not as complex, but rather that they have their complexities – they are unique as a retirement savings vehicle globally, but one that works, fostering high levels of engagement and responsibility on Australians to self-fund for their retirement. Again, technology is driving away the need for paper-based accounting approaches, including the ATO as regulator through their own digitisation strategy.
Whether we see further streamlining within the sector of regulatory functions over the next decade will be intriguing. The past decade saw the Governments look to reduce ‘red tape’ by removing the need for actuarial certificates and to also change to a tri-annual SMSF audit framework – both were vigorously defended from within the sector and did not eventuate, arguing that such decisions would not drive down costs (and likely increase costs). It must be said therefore, that the next decade will see Governments looking to ways in which the sector can continue to simplify the management and operation of SMSFs, without reducing the regulation and appropriate levels of governance required to continue its success.
Overall, the industry must CONTINUE to pursue simplicity for trustees to engage and manage their retirement savings, without reducing the level of regulation required to successfully manage the SMSF sector.
Costs & performance
Comparing costs of SMSF to other segments of the superannuation industry has always been a case of comparing “apples and oranges”. The recent ASIC fact sheet added nothing to this debate by publicly stating average costs of running an SMSF are $13,900.
As stated by the Cooper Review panel, trustees need to be supported by having access to information that is relevant, reliable and comparable to make better decisions. This is one of the key problems currently with government agencies relying on static data that is typically published using data 2 years older or more. In many respect, it was with this frustration that I created the Future of SMSF report to help better understand the types of services and fees charged by practitioners to their SMSF clients.
The decade ahead will see significant advancements within the SMSF sector with the use of ‘big data’ – that is, analysts and/or algorithms being able to use information to support strategy considerations, modelling of retirement savings, and much more. How this data can be used to engage all stakeholders to help facilitate better decision-making should continue to be a priority for the industry over the next decade. For the practitioner, this ability to leverage technology and the data available with it, will play an important role in the delivery of value to support trustees over the next decade.
Overall, as an industry we must CONTINUE to challenge and find ways that support reliable, relevant and comparable data to facilitate better decision making.
Approach to Investing
With very little having changed around the investment restrictions and related party transactions, the sole purpose focus on providing retirement benefits still stands true today.
As a result, as a sector, we must continue to focus on investing for retirement and not to obtain any present day benefits.
Risk framework to combat rogue activity
This remains a key challenge for the Regulator as illegal activities become more sophisticated each year. The next decade isn’t necessarily going to get any easier for the ATO in seeking our fraudulent activity and illegal early access, however expect to see additional barriers to entry and greater enforcement action as required where trustees are not doing the right thing.
As a result, this statement remains true today and into the decade ahead.
I believe as an industry it is important to not lose sight of the work done in this final report, it is very easy as time goes on to forget the role the work this review has achieved (including dispelling many myths that existed). Therefore, it is not to disregard as time goes on, but to reflect and challenge this work in today’s environment to ensure it stands for the decade ahead and many more to come… it is this infinite game that we play, and as a profession need to ensure that SMSFs lead the way and stay ahead of curve, not behind.
As always, I would be interested in your thoughts as to whether the vision for SMSFs is still calibrated correctly as we move into the decade ahead?