Sherry Walks Into Super's Exploding Minefield

Sydney Morning Herald

Saturday March 22, 2008

Allan Fels and Fred Brenchley. Allan Fels is dean of the Australia New Zealand School of Government. Fred Brenchley is a former editor of The Australian Financial Review.

THE boom times in self-managed super funds, in which they have attracted about a quarter of the total $1.2 trillion super pot, are about to end.

The federal Minister for Superannuation, Nick Sherry (Australia's first minister for super by the way), is quietly rounding on a series of measures that will probably result in the self-managed funds having a $200,000 minimum entry level and their trustees governed by tighter regulation and new penalties.

Any idea of expanding the pull of such funds by increasing the number of trustees from four to 10 to attract larger families and younger people, as proposed by a parliamentary inquiry last year, has been canned.

Self-managed super funds have exploded in recent years, driven by the perception of cheaper costs, the attraction of direct control and generous in-house asset test rules. Accountants, seeing a new fee stream, have pushed them to small business clients.

From 97,000 in 1995, the funds burgeoned to 370,000 by last December. The sector holds about $300 billion of superannuation assets.

With a guillotine hanging over future growth, the self-managed funds sector is suspicious of Sherry's "reforms", seen as only aiding the big industry and retail funds. The fact that Sherry himself was a founder of the Hostplus industry super fund only fuels suspicions.

However, Sherry says he plans to crack the governance whip across all three levels of funds. His interest in the self-managed funds stems from a survey by the Australian Tax Office, which regulates the sector.

It found that 21 per cent of participating self-managed super fund trustees had a "low to medium" or "low" knowledge of their obligations. Thirty per cent of new trustees could not explain the sole purpose test (the sole objective is supposedly retirement benefits), more than 15 per cent did not have an investment strategy, while 25 per cent were unaware of the restrictions on assets that can be acquired from related parties.

Sherry also cites the finding that many self-managed funds held more than 35 per cent of their investments in cash or liquid securities. While this was beyond the norm in the booming sharemarket at the time of the survey, it would be seen as the mark of a savvy investor in current market turbulence.

However, most damning are separate Tax Office figures revealing the high ratio of operating expenses to total assets for smaller self-managed funds. These range up to 10.5 per cent for a fund with just $50,000.

According to the Tax Office, 30 per cent of the self-managed funds have less than $200,000 in assets. If Sherry introduces a $200,000 threshold that could cull almost a third of current self-managed funds, although transitional arrangements will undoubtedly apply.

So what is Sherry planning? He has created an advisory group stacked with industry members (there are no consumers or even employers), invited wider industry comments, and aims to reveal detailed reforms by the end of next month.

Apart from talking up a minimum $200,000 threshold, Sherry is angling for tighter governance, possibly bringing self-managed fund trustees under similar super safety disclosure and reporting that applies to bigger retail and industry funds. That will probably push many self-managed funds into sub-plans of bank and industry funds.

Penalties would also be broadened. The only sanction now available to the Tax Office is to remove tax concession status. Sherry is likely to introduce a range of penalties for various breaches.

There is pressure from within the Labor Party for him to restore the privileged position that the big union-controlled industry funds enjoyed under Paul Keating's initial super initiatives. John Howard's super reforms and his anti-union bent swung the balance to self-managed funds at the expense of industry funds.

Sherry rejects the notion that he is about to cut the self-managed funds sector off at the knees. His worry, he says, is the minority of such funds with lax governance. "The Government is currently taking industry submissions on the best way forward - after which I am confident we will still have a thriving SMSF sector."

Maybe. But Sherry should tread warily. About 700,000 Australians have their super in those 370,000 self-managed funds, many of them Howard battlers who decided to give Rudd Labor a chance. Whacking their super funds could be political stupidity.

Clearly some smaller self-managed funds suffer exorbitant operating expenses, and current rules enable some trustees to sail close to the wind on investment rules. But in any rebalancing, Sherry needs to be careful not to give union and retail fund competitors a free kick at the expense of well managed smaller self-managed funds.

© 2008 Sydney Morning Herald

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