Self-managed super: a ‘fad’ that’s here to stay

While recent suggestions that SMSFs are a passing fad currently seem farfetched, there are questions surrounding their appropriateness for some clients that need answering. However, if the findings of the Cooper Review are any indication, there are bigger problems elsewhere.

The Government has welcomed the Productivity Commission’s report into default funds under modern awards, but the devil will be in the detail of how it translates those findings into legislative and regulatory reality.

During the roundtable published in this month's Super Review, the chairman of Media Super and former chairman of the Australian Institute of Superannuation Trustees, Gerard Noonan, suggested that self-managed superannuation funds (SMSFs) represented a fad that would, eventually, pass.

If this is the case, then SMSF may well prove to have been the longest-running fad ever experienced in Australia – one that seems to have sustained its momentum for more than a decade and which, on the available evidence, is showing no signs of giving way to a new fashion.

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In describing SMSFs as a "fad", Noonan was reflecting some of the concern which exists within the industry funds movement about the popularity and consequent growth of SMSFs.

In particular, he was reflecting the worry about industry fund members being inappropriately advised in to self-managed products. That worry is not unjustified.

While recent data produced by the Australian Taxation Office (ATO) and the other regulators suggests breaches by SMSFs are broadly in decline, that research does not deal with a key underlying issue – the appropriateness of actually establishing a self-managed fund.

While it has been conventional wisdom in the financial planning space that clients should not be directed towards SMSFs if they have balances of less than $250,000, there exists evidence of SMSFs being established on the basis of balances of as little as $40,000.

SMSFs established on the basis of balances of as little as $40,000 are problematic and it is to be hoped that they are the exception rather than the rule. The angst of the industry funds is understandable in circumstances where $40,000 falls very close to the average balance held by their members.

What the industry funds need to understand, however, is that few people have actually identified SMSFs as a problem, with the Cooper Review setting the tone by adopting the position that the self-managed area did not warrant undue attention.

With the electoral clock currently counting down to the 2013 election, it is unlikely the Government will see fit to seriously disagree with the Cooper Review findings.

Notwithstanding the ticking of the electoral clock, the Government has seen fit to endorse the findings of the Productivity Commission inquiry into default funds under modern awards and enshrine a continuing role for the industrial judiciary, albeit via the added layer of a Default Superannuation Panel.

The Minister for Financial Services and Superannuation, Bill Shorten, made his preference for the specialist panel within Fair Work Australia clear when he publicly supported the content of a submission to the Productivity Commission formulated by two of his departments - Treasury and the Department of Education, Employment and Workplace Relations.

The minister's early and vocal support of the departmental submission was seen as placing undue pressure on the ultimate findings of the Commission – something which has subsequently been denied by the Productivity Commission's deputy chairman, Mike Woods.

Woods told Senate Estimates: "…the departmental proposal was that funds would be able to put their proposals to a panel of experts which would then make recommendations to the full bench of Fair Work Australia. We are adamant that all funds should be able to have standing for this purpose directly to a panel of Fair Work Australia as the final decision maker".

The test for the Government and Shorten was always going to be whether it went with the formula outlined in the departmental submission – or with the distinctive difference referenced by Woods.

Either way, the Federal Opposition may well choose to ignore the Productivity Commission's final report and legislate based on its preliminary report findings supporting the eligibility of all registered MySuper products to be default funds under modern awards.