There is further evidence of conflicted and poor-quality advice being provided to individuals over the use of LRBAs which could put consumers’ retirement savings at risk, according to research from the Council of Financial Regulators.
LRBAs – known as limited recourse borrowing arrangements – are used by SMSFs to take out loans for property at a higher rate than the market generally offers.
The 2022 Report to Government on Leverage and Risk in the Superannuation System also found there was a risk of inappropriate advice provided through property one-stop shops.
The research found the proportion of SMSFs using LRBAs had grown from 2.9 per cent to 11.8 per cent between 2013 and 2020 withLRBA assets representing 71 per cent of total assets in SMSFs that contained an LRBA.
The value of assets held under LRBAs increased from $8.8 billion in June 2013 to $59.7 billion in June 2021 and at that point of time represented 7.2 per cent of total SMSF assets (compared to 1.9 per cent in June 2013).
The first iteration of the report was prepared in 2019 and found LRBAs were a “significant risk” to some individuals’ retirement savings and concluded the government may wish to further consider policy changes, referring to the 2014 Financial System Inquiry’s recommendation that LRBAs be prohibited.
However, the report noted LRBAs are unlikely to pose a material risk to the superannuation or broader financial system.
Earlier this week, experts told Professional Planner increasing interest rate rises put poorly-diversified SMSFs, that were heavily leveraged in property via LRBAs, at risk.
Who’s holding?
LRBAs are most common in SMSFs with a net fund size (total assets excluding the value of the amount borrowed) of between $200,000 and $500,000.
In 2020, the average borrowing of SMSFs with LRBAs was $350,492 and the average value of LRBA assets was $778,600 of SMSFs with LRBAs.
SMSFs with LRBAs assets remain highly concentrated in their investment strategies with 43 per cent holding over 90 per cent of their total asset value under LRBAs in 2020 (up from 41 per cent in 2017).
“Less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price, could lead to a significant loss in value of the SMSF which could be magnified by borrowing,” the report said.
“Further, this high degree of asset concentration could exacerbate risks to SMSF members if personal guarantees are involved, leading to a loss of personal wealth beyond superannuation.”
The total borrowing amount for SMSFs was around $27.8 billion as of the end of the 2021 financial year.
The leverage ratio (total LRBA borrowings divided by total LRBA assets) for SMSFs with LRBAs has declined from 34.6 per cent in 2017 to 32 per cent in 2020 as asset prices have risen.
APRA data cited by the study found lending to SMSFs comprised less than one per cent of overall residential mortgage lending by authorised deposit-taking institutions as at the March quarter 2022.
The council provided its report to the Treasurer in late September 2022.
