The self-managed superannuation sector is in good shape according to the head of the SMSF Association, despite an incoming demographic shift that may see a reduction in its share of the retirement industry’s investment cache.
The introduction of new contribution caps in 2017, as well as the outflow of pension payments to retirees and the natural outgoing tide of wealthy boomers will probably lead to a reduction in the sector’s roughly 30 per cent foothold of the $2.7 trillion dollar retirement industry, and John Maroney is comfortable with that.
“We tend not to worry too much about being the biggest sector,” he says. “It’s great that we’ve got up to 30 per cent, but I think it’s more likely that we will decline somewhat in percentage terms over the next ten years, mainly via demographics.”
Maroney predicts that many of the older retirees in the SMSF sector will either extinguish their savings or pass them onto beneficiaries in the coming years, while some will choose to wind them up in favour of easier options.
Another common scenario, he explains, is for the fund to be closed when the driving force in a relationship passes away and the other person, typically in their 70s or older, decides to shift into a more managed environment. “That’s just a natural thing,” he adds.
The quantum of retirement assets in the SMSF sector could shrink as much as five percentage points, he reckons – an estimate actuary Rice Warner agreed with in its Superannuation Market Projections Report 2016. In the same report Rice Warner noted that the number of SMSFs is growing at a much slower rate than previously.
The slowing rate could be described as another ‘natural thing’. Since SMSFs were introduced at the turn of the century they have completed a 20-year introductory cycle with a phenomenal, yet unsustainable take-up rate. Eventually, most of the people who wanted one got one.
A less natural thing has been the rapid ascendancy of industry funds, which have won savers over with superior returns and savvy marketing. Industry funds are either set to overtake SMSF assets at any time or have already done so, depending on who you listen to.
A healthy part of the system
According to Maroney, however, the sector is almost exactly where it needs to be.
“As long as the sector remains attractive for those that are in there then that’s great,” he tells Professional Planner. “If that remains at 30 per cent or 25 per cent or somewhere in between then for me that’s a good indicator that it’s a healthy part of the system.”
The SMSF system, he reckons, is about members – not metrics.
“Our aim is to help people meet their goals, not to be the biggest or have the highest performance numbers,” he says.
Returns are a key consideration for the SMSF sector; the choice to tailor investments in the hope of making more money, usually with the help of a financial adviser, is the raison d’etre of the industry. You don’t go through the work and expense or becoming an SMSF member without expecting a superior return.
Maroney points out that return comparisons aren’t appropriate, anyway, because there is a disproportionate number of older retirees in SMSFs – compared to APRA regulated funds – that have already dialled back on risk.
“A lot of the retirees over 65 are relatively conservative [so] they want to preserve their capital and make sure they have enough to live on,” he says. “If that means they’ve got less exposure to the markets, that’s fine.”
Bringing people together
The association head acknowledges that the SMSF industry has issues that need addressing, including the proclivity of savers to favour domestic equities. That’s been changing, he says, with the growing array of managed funds and ETFs that provide exposure to global shares, but it’s slow going.
“If you’re part of an older demographic and you’ve never invested internationally, thinking about it for the first time at 80 is a lot more difficult than when your 40,” he notes.
The advice industry, too, is something Maroney marks for improvement. While he thinks highly of advisers and believes they’re well equipped to manage the $800 billion worth of SMSF funds out there, he believes our regulatory system is holding it back. He cherry picks a few issues – a “failed” limited licensing arrangement, the need to move towards ‘open superannuation’ and Standard three of the Code of Ethics – that need addressing, and notes that the advice industry is a key lobbying focus for the association.
“All the nuts and bolts have become much more complicated,” he says.
Despite the issues, Maroney believes the sector’s future is bright. As the association’s February 19 National Conference draws near, he says the event will provide a great platform for people to meet and bond over the industry’s future.
“We’re focussing on our part in the superannuation system and the conference plays a big part in that,” he says. “It’s a good opportunity to bring people together.”
