‘For-profit’ culture weighs down super system

The "for-profit" culture enshrined in the banks' business model is weighing down the superannuation system, Industry Super Australia believes.

Pointing to the latest SuperRatings' data, the body's chief executive, David Whiteley said not-for-profit industry super funds continued to outperform for-profit bank-owned funds in the short, medium, and long-term.

"The habitual underperformance by bank-owned super funds is a drag on member returns and national savings, they are letting the Australian public down," Whiteley said.

"The ‘for-profit' culture enshrined in the banks business model is weighing down the super system. This is the same culture that has overseen countless financial scandals and a loss of trust in the banking sector. It is time that government acted and investigates this underperformance."

Whiteley said while banks chased profits at members' expense, industry funds were focused on getting the best super returns by making deep, long-term investments especially infrastructure, which in turn would strengthen the foundations of the economy.

Jassmyn Goh - Super Review

Energy Super appoints MLC as income protection insurer

Industry super fund, Energy Super, has appointed MLC Life Insurance as the provider of its Group Salary Continuance Insurance.

MLC said the contract was a significant step for the firm as it continued to expand its presence in the industry fund sector and in the Brisbane market.

MLC Group Insurance general manager, Suzanne Smith, said: "We're passionate about partnering with funds whose culture aligns with our values of being customer centric".

"Energy Super demonstrates these values to its members, which is why they are the perfect partner for us as we continue to expand our offering within mid-size industry super funds," she said.

Energy Super chief executive, Robyn Petrou, said: "Together, we have built a model to enhance service and speed up claims management for members which will enable us to drive and deliver on our members' experience of service quality and responsiveness".

Insurance – one size does not fit all

Superannuation funds need to consider different types of default insurance cover which better reflects the status of their members, according to leading actuarial research house, Rice Warner.

The firm has published an analysis in which has examined the shortcomings of the current insurance within super regime and suggested that some significant challenges exist in making insurance cover appropriate in circumstances where one size does not fit all.

"Perhaps the biggest challenge for superannuation funds in providing appropriate and adequate life, TPD [total and permanent disability]and income-protection cover is that the insurance needs of members vary significantly depending upon the composition of their families," it said.

The analysis suggested that this could be addressed by funds differentiating members' default cover by marital status and number of dependent children instead of just by age.

It said that, ideally, fund data bases should record the family characteristics of their members.

"The level of default cover held by young single members, is likely to be higher than their needs given that most have no children," the analysis said.

"In contrast, the insurance needs of members tend to increase with age as they form families and accumulate debt. Yet the typical default cover meets only about 30 per cent of the basic life insurance needs for families with children."

Rice Warner suggested there were steps which superannuation funds could take to improve the adequacy and appropriateness of their insurance cover offerings including:
  • Differentiating members' default cover by marital status and the number of independent children instead of merely age.
  • Tailoring insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
  • Maintaining insurance for older members. Many superannuation funds' default covers taper rapidly as members grow older but their insurance needs may not reduce.
  • Encouraging members to report to their superannuation funds life events such as having children, taking a home loan and older children becoming financially-independent. This information would assist funds to better align default cover to their members' circumstances.
  • Considering the fundamental redesign of their TPD and income-protection cover to provide a "disability package" that is closely aligned to needs.

The analysis said members should not assume that their superannuation fund's default cover is adequate for their circumstances because it almost certainly was not.

Mike Taylor

This article appeared in Super Review, 3 May 2016

In Transit - the difficulties of transitioning service providers

The difficulties of transitioning service providers should not be underestimated . Vincent Sita provides a handy checklist to ensure trustees consider all the processes when making the transition.

Those within the industry do not need to be told about the unprecedented change that the superannuation sector has undergone over the last decade; whether managing regulatory change, consolidating, producing innovative products or changing how to better meet member expectations. The consistent themes through all this upheaval have been striving for good governance and delivering good value to members.

One way trustees are responding to this continued change is by critically assessing their operating models. In an increasing number of cases, this has led to the transitioning of service providers for key functions including member administration, custody, and insurance.

It is now timely to reflect on how these transitions have gone and what has worked well. There are many case studies on the impact of poorly planned and executed transitions, which become costly for all parties involved. It is easy to fall into the trap of underestimating the significant time, resources and experience needed to achieve a successful transition .

Trustee check list for transition success - A trustee may follow this checklist to better enable transition success.

1. Process and controls

• An early benefits realisation plan should define specific objectives that are easily measurable and represent a positive return. This plan, and expected benefits, should be revisited at the completion of each major milestone or stage gate.
• Defined go/no-go decision criteria, with specification of the following critical factors that often get neglected: evidence requirements; when and how involvement of a senior group of approvers is necessary; and minimum requirements to pass through a stage gate.
• An adequate warranty period post-go is essential to allow for any issues to be resolved by the project team who have the skills and knowledge to rectify issues efficiently and effectively. Allowing the warranty period to span across at least one month end or periodic review process is critical.

2. Governance

• Strong executive support and continuous involvement throughout the project. While the initial planning and final 'go/no go' decisions are critical, so too are each of the key milestones and stage gates.
• A steering committee composed of representatives from across the entire business. Trustees should consider including a strong independent adviser who has worked on programs of this type before, to provide the board with confidence that the transition is being managed effectively, and provide a perspective that is not clouded by history or vested interests.
• A project manager with experience executing similar projects in similar environments and circumstances . This person should understand the business, people, process, data and technology aspects.
• A working group structure that spans the organisation. It is important to include client and service provider representatives (for a service provider transition this will be trustee representatives).
• A multi-disciplinary project team. This will usually include staff from multiple vendors, so the team should be co-located to aid collaboration, cohesiveness and information transfer. 
• An operating rhythm of management and governance meetings that permits the cascading of information and appropriate flow and escalation of decisions.

• A robust planning process involving all key stakeholders, with particular focus on alignment and agreement on what success looks like, including clear objectives and detailed measures of success.

3. Risk Management

• A comprehensive risk identification and management process that includes all key stakeholders and risks threatening the project's successful delivery. A pre-mortem that looks ahead at the challenges that could cause failures is a valuable tool for identifying risks.

• This should be supplemented by an issue management process that allows for quick remediation of risks that become issues. In particular, actions taken to address issues should be well defined with clear accountabilities and an appropriate evaluation and escalation process.

• A process for  involving the business in the identification of delivered risks arising from changes made   to systems, processes and roles. This includes a wide range of considerations such as information security risks, impacts on regulatory obligations, the effectiveness of operational process and ultimately member and reputational risks that may have severe consequences for trustees and the superannuation fund.

• An independent assurance program that performs review activities at key points throughout the project lifecycle, to provide trustees with confidence over the transition. This should include, at a minimum, an initial setup review, a post-design review and a pre-implementation review.

4. People and Culture

• Organisational design needs to be considered early as part of the target operating model, by a dedicated organisational change stream. This must consider more than just a system and process change-the impact on people is critical.

• A detailed resourcing plan needs to take into account the balancing of competing resource demands, such as business as usual activities or other projects. Agreements should be in place to cover the time commitment of resources with multiple business and project roles.

• Training and up-skilling the right people at the right time is a key to the ongoing success of the organisation. A detailed training plan, identifying and addressing training needs and appropriately evaluating staff knowledge, is critical.

• The cultural aspects of change should not be neglected; a process for planning and measuring changes to the organisational culture should be formulated. The Australian Securities and Investments Commission has flagged an increasing focus on conduct and culture within financial services organisations, and any change program should have a strong focus on all organisational change

5. Data and Technology

• The use of a cross-discipline architectural decision making committee. Such a committee is necessary to future-proof the solution and ensure alignment with information technology strategy. Key decisions are likely to be needed around systems and the organisation's approach to technologies, like cloud computing. The project's impact on existing infrastructure will need to be considered, such as the need for an increase in processing capacity  or bandwidth.

• A thorough test strategy should be in place, with an early and long user acceptance testing (UAT) cycle, involving a broad range of affected staff . These should include all business specific scenarios, including unusual or one-off events or transactions .

• The early assessment of data quality, as an input to the data migration plan and in order to identify possible process deficienc ies that can be remediated. These deficiencies, which can be identified through advanced data analytics tools and techniques, can be remediated prior or during the migration, depending on their severity . The team should create a thorough data migration plan that has tested and rehearsed the extract, transform and load in a test environment.

• A business as usual transition plan, which gives due consideration to operational support for hardware, software, process and people elements.

This article appeared in Superfunds December 2015

Super helps financial services become dominant sector

Superannuation has been confirmed as one of the key drivers making financial services the fastest-growing industry in Australia over the past two decades.

The status of the financial services and the role played by superannuation has been revealed in the latest Financial Services Council (FSC) UBS State of the Industry report released today.

According to the report, in the 12 months to 30 September 2015, the financial services industry added $141 billion to the economy or $5,881 for every Australian, with the industry exceeding the value of all mining activities by $532 million.

Commenting on the report, FSC chief executive, Sally Loane said it served to confirm the significant contribution being made by financial services to Australia's economic and employment growth.

UBS Asset Management Australian head, Bryce Doherty said the report highlighted a potential opportunity for innovative financial services firms to increase exports of financial services, which are currently only 3.5 per cent of the $2.6 trillion in funds under management.

However, he said it was also clear the industry needed to play an important role at home in providing clarity and simplicity for all Australians' futures."

"Australia has world class fund managers who understand the need for the industry to continue to develop innovative, flexible, and transparent products that help Australians fulfil their current and future financial needs," he said.

However, in doing so, Doherty pointed to the issue of Australia's ageing population saying that it was alarming that recent surveys had indicated that over half of non-retired Australians considered it unlikely they would have enough money for a secure and dignified retirement.

"It is essential that the finance industry works with government to provide clarity and incentives for Australians to ensure the number of future retirees requiring tax payer support is reduced to a minimum," he said.

From Super Review Online, 25 Feb 2016

Economies of scale and scope in Australian superannuation (pension) funds.

Helen Higgs and Andrew C. Worthington are researchers in the Department of Accounting, Finance and Economics at Griffith University, Australia. Their research interests include the drivers of structural change in the Australian superannuation industry. 

Abstract This article provides estimates of economies of scale and scope for 200 large Australian superannuation (pension) funds using a multiple-output cost function. We separately define costs in terms of investment expenses—including investment, custodian, and asset management fees—and operating expenses—comprising management, administration, actuarial, director and trustee fees/charges. The four investment outputs are cash flow-adjusted net assets, the number of investment options, the proportion of total assets in the default strategy, and the five-year rate of return for investment costs, while the four operating outputs are cash flow-adjusted net assets, the number of members, net contribution flows, and net rollovers for operating costs. We find that economies of scale hold up to at least 300 percent of current mean fund output in both investment and operating costs. There is little evidence that economies of scope prevail, generally reflected in the proclivity for many superannuation funds to contract out aspects of both investments and operations.

Keywords: economies of scale, economies of scope, cost efficiency, superannuation (pension) funds

View a copy of the article here.

The End of the Road?

Is the market for superannuation administration services in Australia at the end of the road? The marketplace for what we call superannuation administration services is no longer competitive. Yet, competitive risks and opportunities remain if we divide and redefine the market into the distinct services which make up superannuation administration.

Competition in the market for superannuation administration was substantially lessened with the acquisition of Superpartners by Link Group in late 2014, giving a single service provider a market share over 85% of all outsourced Australian Prudential Regulation Authority (APRA) regulated superannuation in Australia (excluding self-administered RSEs from the market).

This appears to place Link Group in a strong market position, with few comparable alternatives for trustees of APRA regulated superannuation funds looking to outsource or change provider of administration services. On closer inspection, there are some indications that the market might start to fragment, giving rise to competitive opportunities and risks for existing and new service providers to the market.

On face value, one could be excused for thinking that the acquisition might have attracted the attention of the competition regulator. The ACCC didn't intervene, even though the acquisition has substantially lessened competition. Superpartners' technology and system related troubles over the past decade meant that they could not really be considered to be a vigorous and effective competitor. Furthermore, there was a strong argument that Superpartners was a failing firm, with Superpartners in imminent danger of failure due to being unlikely to be successfully restructured without the acquisition.

An obvious view in such a consolidated market is that with such a strong market share position, Link will be able to use their strong competitive position and stranglehold on market share to concurrently capitalise on efficiency gains through the economy of scale in centralising the fixed costs of infrastructure while incrementally increasing the fees charged per member (yet reducing fees relative to growing asset values).

There is certainly some truth in this, and is likely to be forefront in the mind of potential investors when Link proceeds with an IPO on the ASX this year. Yet on closer inspection, there remains reason to believe that vigorous competition in the market might be just around the corner.

Click here to read the rest of the article

NGS Super and QIEC look to form master trust

In what is believed to be a precedent in the industry funds sector, two superannuation funds have signed a memorandum of understanding to pursue a merger based on the formation of a master trust structure.

Importantly, the two funds, NGS Super and QIEC, represent those working in the education sector and their merger would still result in a comparatively modest $7 billion 128,000 member fund.

The chair of QIEC Super, Terry Burke, and the chair of NGS Super, Dick Shearman have issued a joint statement confirming consideration of the move.

"The master trust structure is well used by retail funds to gain benefits of size while still enabling marketing of individual funds within the trust," Shearman said.

"We think the master trust structure can make good sense in the industry funds space."

He said the boards of QIEC and NGS Super had executed a Memorandum of Understanding with the intention of investigating the Master Trust model to gain greater economies of scale while enhancing the benefits for both member groups."

"It is important to both NGS and QIEC Super that a viable and significant fund which understands the particular needs of education workers continues to exist in the non-government education space."

"Initial discussions have identified potential benefits and synergies and we now want to examine those more fully in a formal due diligence process."

Burke said that QIEC Super was the leading fund in Queensland non-government education and while the master trust structure could bring added benefits to its members the trust arrangement would also provide further presence for NGS Super as the only truly national fund in non-government schools.

"No decisions have been made ahead of the due diligence and while investments and insurance are obvious areas for potential integration, other aspects such as brand, marketing and fund administrator can continue with current arrangements under the master trust model." Burke said.

NGS Super manages approximately $7 billion and has 100,000 members nationally. QIEC manages approximately $1 billion and has 28,000 members, mainly based in Queensland. Both funds serve the non-government/independent schools sector, with QIEC having a larger presence in the early childhood education segment than NGS.

Source:http://www.superreview.com.au/news/superannuation

Retail super members gouged by $7.1bn: ISA

Industry Super Australia (ISA) estimates that in the past decade bank-owned super fund members have been gouged by about $7.1 billion for above market fees to in-house suppliers.

The estimate was released hours before the Senate will hold its final debate on the superannuation trustee governance bill.

ISA chief executive David Whiteley said the latest analysis is more evidence of the conflicted nature of bank-owned super funds and "their vertically-integrated business model, which is eating into the retirement savings of millions of Australians."

"This is the key issue which the parliament should be debating. Instead, the bill currently before the parliament seeks to narrowly target the governance of industry super funds and their successful representative trustee boards that guard against many of the practices endemic in the finance sector," Whiteley said.

The ISA research builds on APRA data from 2010 and 2012, and estimates the cost of retail and bank-owned super funds paying above market rates to their own in-house suppliers for super fund services.

ISA estimates these payments have cost members of bank-owned super funds $783 million a year since 2006 or $7.1 billion from 2006 to 2014.

"The APRA research suggests that banks are boosting other parts their business by paying above market

rates for superannuation services. This appears to be coming at the expense of the banks' own super fund members," Whiteley said.

"The extent of the related party deals exposes the key governance challenge within superannuation. There is an inherent conflict faced by the for-profit sector which must reconcile the competing interests of fund members and shareholders. The persistent underperformance of these funds reveals it is members who are losing out."

Using an APRA analysis published in 2010 which compared the prices paid to independent suppliers and related party (in-house) suppliers by for-profit retail funds and by not-for-profit super funds, ISA has updated the ongoing costs through to 2014.

While all super funds outsource administration, asset consulting and fund management services to both in-house and independent or external suppliers, APRA found that only the retail sector paid above market rates for in-house services. Where banks used independent suppliers, the APRA data found no statistically significant difference in the cost.

The ISA analysis takes into account the impact of foregone investment due to the leakage caused by overcharging relative to market rates.

Source:http://www.financialstandard.com.au/news/view/55669587

In super, the Danes are great, Australia a close third

Australia’s superannuation system has been judged to be the third best retirement system in the world, according to the Melbourne Mercer Global Pension Index (MMGPI) Report released this week. The 2013 Report replicates last year’s findings, with Denmark’s retirement system found to be the most robust, followed by the Netherlands and Australia.

The MMGPI Report ranks the pension systems of countries across a range of indicators to determine an overall index value for each nation. The Report now covers 20 pension systems affecting approximately 4 billion people, or some 55% of the world’s population, including China and India.  It is a collaboration between global consulting firm Mercer and the Australian Centre for Financial Studies (ACFS), with support from the Victorian Government.

How the Global Pension Index is calculated

The overall index value for each country’s system is made up of three sub-indices; Adequacy, Sustainability and Integrity.

Adequacy is 40% of the total, and represents benefits, tax support and asset allocation. Sustainability has a 35% weighting based on the likelihood that the current system will continue providing benefits into the future. It includes coverage, the level of current government debt and trends in labour force participation rates for older workers. The Integrity sub-index is worth 25% and considers governance, protection, communication and costs, all of which impact on public confidence.

An ‘A’ grade system requires an overall score above 80 and is “a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.

Danes hold off the Dutch and Aussies (again)

In a repeat of last year’s podium, Denmark’s pension system had the highest overall index value ‘A’ grade at 80.2, followed by ‘B+’ grades for the Netherlands (at 78.3) and Australia (at 77.8). Switzerland and Sweden were close behind, while the UK slotted into 9^th place (65.4) at the lower end of the ‘B’ grade. It was judged to have an inferior pension system to Canada, Singapore and Chile. The US fared no better, placing 11^th (58.2). Japan is the only mature, developed economy with a retirement system rated ‘D’, having been given an index value of just 44.4. Japan’s low overall score was primarily due to a woeful Sustainability sub-index score of 28.9, the equal second lowest with China across the 20 nations.

When it comes to retirement, what makes the Danes great?

According to the Report’s lead author, Dr David Knox, Senior Partner at Mercer, Denmark has design features that would be the envy of most other nations:

• a universal age pension that equates to 17% of Danish average earnings. This is reduced if an individual’s income from employment is greater than 75% of average earnings
• in addition to the basic pension, there is an income-tested supplementary pension of up to a further 17.1% of Danish average earnings. This means that the poor receive a pension of 34.1% of average earnings
• both pensions are adjusted in line with movements in average earnings. According to OECD tax revenue data, the average wage in Denmark for 2012 was US$49,887 versus US$48,199 for Australia
• a nation-wide statutory fully-funded system covers all employees and provides a lifelong pension in retirement. Contributions to this system are based on hours worked per month
• occupational schemes round out the system, with fully-funded Defined Contribution (DC) schemes enjoying almost universal coverage where end benefits are usually taken as annuities rather than as lump sums.

The level of mandatory contributions in Denmark is more than 12% for most employees, versus the current 9.25% Super Guarantee rate in Australia.

Denmark is also held in high esteem for its universal government-funded health and education systems, but it comes at a price borne by the Danish taxpayer. Danes are amongst the highest- taxed citizens in the world, with a top tax rate of 60.2% phased in at 1.1 times the average wage. Australia’s top tax rate of 47% (plus Medicare) phases in at 2.4 times our average wage.

Can Australia turn its ‘B+’ into an ‘A’?

Australia’s ‘B+’ rating indicates “a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A grade system”. Improvements could come from:

• increasing the labour force participation rate amongst older workers
• increasing the age pension age as life expectancy continues to rise (note: it is already scheduled to move to 67 for those born after 1 January 1957)
• increasing the minimum benefit access age so that preserved benefits aren’t available more than five years before age pension eligibility
• removing legislative barriers to encourage more effective retirement income products, and
• introducing a requirement that part of the retirement benefit must be taken as an income stream of some description.

The final two issues received much discussion at the MMGPI launch. As Dr Knox put it, “Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe.”

SMSFs – the $500 billion ‘joker in the pack’?

Australia’s overall index value rose 2.1 points year-on-year, mainly due to a significant jump in its Integrity sub-index, which scored the highest of any nation. A major factor was the introduction of the Stronger Super reforms that are already leading to improved governance and stronger regulation. Australia is now one of only three countries that require public offer funds to have a conflicts of interest policy in place.

However, these reforms apply primarily to ‘APRA-regulated’ funds, which account for approximately 66% of the nation’s superannuation. SMSFs are not, other than at the margin, affected by these regulatory changes. SMSFs will not have to create an operational risk reserve, nor supply members with a ‘Standard Risk Measure’ statement outlining the likely frequency of negative returns over a 20-year period. SMSFs trustees need to prepare an investment strategy but, unlike their public fund counterparts, do not need a risk management strategy nor a conflicts of interest policy. SMSF members do not have access to the Superannuation Complaints Tribunal, a government body that arbitrates on member grievances made against super funds.

It would not be unreasonable to question whether, if the SMSF sector continues to grow apace, the differing governance standards between APRA-regulated fund and SMSFs will affect Australia’s Integrity sub-index score over time, compromising Australia’s overall place in the list of elite retirement systems. Recent signs are that regulators are watching closely.

Enhanced focus on delivering sustainable incomes

The Melbourne Mercer Global Pension Index is an ambitious undertaking, but one that pays dividends in the quality of data it brings to the comparison of pension systems around the globe. The Report is now keenly anticipated by superannuation professionals and global pension managers globally. It is a key source of insight into the health and robustness of pension systems and how these systems might be improved. Australians should be justifiably proud that work of such global importance is being undertaken here.

One of the key messages from the latest report is the need to ‘start with the end in mind’. Pension systems exist to provide benefits in retirement, and the best systems deliver that goal to the greatest number by the most robust means possible. A mind-shift away from focussing primarily on capital accumulation and more toward post-retirement income generation is needed.

 http://cuffelinks.com.au/super-danes-great-australia-close-third/

Harry Chemay is a consultant to superannuation funds, an alumnus of Monash University and a member of Finsia. Both organisations are consortium members of the Australian Centre for Financial Studies. He previously worked for Mercer.

SMSFs – Have they plateaued?

While SMSFs remain an important part of the superannuation landscape, growth of the sector has slowed. However, what has not slowed are the changes, and Jassmyn Goh reports on what is shifting the dynamic of the sector. 

While self-managed superannuation funds (SMSFs) seem to be a creature of habit in terms of growth trends, the sector is facing a multitude of change. 

The sector reached $571.8 billion in assets in June 2015, according to the Australian Taxation Office (ATO), a slight drop from the quarter before. 

This was possibly due to the drop in the establishment of new funds, 6,700 in June and 7,876 in March, and 283 wind-ups in the quarter – seven more than the previous quarter. 

By the end of June 2015, Australian Prudential Regulation Authority (APRA) regulated super fund assets sat at $1.33 trillion, according to APRA statistics.  

The SMSF Academy managing director, Aaron Dunn, said though SMSF growth has slowed a bit in the last couple of years, it is what has typically happened over the last 15 years. 

“There are spikes that occur off the back of poor market performance and so previously, there’s a thought tendency that was: ‘If markets are bad, why should I pay people money to look after it?’,” he said. 

“In 2008, there was a spike in the number of funds that were set up that year, so part of it’s to do with the growth or decline in annual rates and is a function of investment performance. It’s also impacted by regulatory change, like the Simpler Super reforms.” 

Dunn said when there were a couple of good years of investment performance, SMSFs plateaued out in terms of any growth, due to the mentality of, ‘if it’s not broken, there’s no need to fix it’ when it comes to super. 

“I don’t think we’re going to see any large jumps in moving from 30,000 to 35,000 establishments a year to 50,000, or this concept of ‘will it retain growth at six or seven per cent a year?’,” Dunn said. 

“The numbers will naturally be in the 30,000 to 40,000 year-on-year mark, with any change in legislation maybe taking it towards the top end, and with everything ticking along quite well investment wise and regulation wise, it’s probably going to be at the lower end of the 30 as well. So, I don’t see any material change and that’s pretty much been consistent for a decade or so now.” 

According to Investment Trends, the main reason for establishing an SMSF was to have more control of investments.  

However, “poor super fund performance” reasons had dropped dramatically (8,000 fewer people) in 2014 and 2015, from the previous two years.  

Australian Institute of Superannuation Trustees (AIST) chief executive, Tom Garcia, said the industry funds were doing well with member communication. 

“The money flowing out to SMSFs is certainly plateauing, if not reducing, so the not-for-profits are growing the fastest now, but it used to be for many, many years the SMSF sector. So, the volume of money moving out to SMSFs is slowing,” Garcia said. 

“So, the not-for-profit funds are doing something right in providing good communication and the delivery of retirement income products, and they’re only going to get better at it for people when they retire. That is a function of these funds getting in contact with members much earlier in the piece.”

Garcia noted that industry funds were not necessarily worried about SMSFs. 

“They’re part of the landscape. They realise it is competition. Some of them even work with someone who wants an SMSF but still stays in contact. So, there’s still an element of having chosen to start with an SMSF, maybe you’d like to invest part of your SMSF back into our pooled structure and buy one of our pre-existing options, or utilise that for your SMSF investment,” he said. 

“So, there are different ways they are looking to still engage with the member instead of discarding them, so to speak, or letting them go. Some of the time they will maybe  want to come back and keep the relationship.” 

Times are changin’ 

Like many things, engagement with SMSFs is getting younger and younger, with more people under 45 looking to start an SMSF. 

“Things that are changing are the dynamic of the age group coming into the sector. We are now seeing one-in-four under 45s looking at SMSFs. The other interesting thing is around 40 per cent of members of SMSFs are drawing pensions as well,” Dunn said. 

He added that as those in their late 30s and 40s have been under the compulsory super regime their whole lives, their capacity to be thinking about SMSFs has the potential to be pushed forward. 

“Recently, there has been the strategy to borrow within a fund. That has been an attraction for that group because we can take a 25 year timeframe on those sorts of strategies, rather than thinking about it as a strategy for the next five years. There’s a whole range of levers that are supporting why those younger people are becoming more engaged at an earlier age,” he said. 

Dunn also said as the age group would have more in their account balance than the previous generation at their age, it was more justification to start earlier. 

According to the SMSF Association’s 2015 SMSF report, 72.1 per cent of advisers said they have experienced an increase in demand for SMSF services from 41 to 50-year-old clients.  

It said in 2014, those in the 35 to 44 and 45 to 54 age brackets, made up 62.4 per cent of SMSF establishments.  

“In the last two years, close to two thirds (65.7 per cent) of advisers have seen a growing demand from 31 to 40-year-olds, while more than one in five (21.7 per cent) have experienced an increase in demand from 20 to 30-year-olds,” the report said. 

Dunn said SMSFs now have a more broader appeal than just worrying about individuals on a higher income. 

“If you’ve got high income earners, they’re going to be looking at the same things that others are going to be looking at, like how much they want to put in super, and the ability to put large amounts into super. So, they are looking at other structures just as much as they’re looking at super generally,” he said. 

“I think there’s certainly going to be an appetite for those with larger income brackets. But now, SMSFs are starting to become more mainstream in terms of the type of trustees that might get attracted to it as well.” 

Things that are changing are the dynamic of the age group coming into the sector. We are now seeing one-in-four under 45s looking at SMSFs.

– Aaron Dunn

SMSF Association’s chief executive, Andrea Slattery said account balances were a secondary issue to establishing an SMSF. 

“The main issue is whether or not an SMSF is right for you financially or part of your business or family circumstances. To have something you can build for the next 40 to 60 to 80 years means it’s part and parcel of your plan to develop and grow efficiencies,” she said. 

“The $200,000 minimum balance that ASIC [Australian Securities and Investments Commission] recently talked about is, if you’ve got less than $200,000, then you should be making sure if it’s right for you and to have a good look at it.  

“What you need to take into account regardless of what ASIC suggests is to have competent advice, an understanding of what you’re doing, making engaged decisions about when you’re starting, and how you’re going about it.” 

Dunn noted that there might be a change in the demographics of gender where females may go past males in terms of SMSF membership. 

“When you look at the membership profile there are 52:48 male to female, but over time the percentage has been narrowing over the journey. Maybe because of longevity. We may see in the not too distant future females being a larger representation than males in the SMSF sector,” he said. 

Embracing technology 

With a new generation entering the SMSF space and technology capabilities changing the dynamic of the sector, providers will have to make decisions around technology and delivery of services. 

“A fifth of SMSFs are using cloud tech and tech that’s starting to redefine the way businesses are looking at offering services to existing trustees,” Dunn said. 

“The technical stuff is going through the motions at the moment, while we wait for government to give guidance.” 

Dunn said around 60 per cent of all SMSFs are being set up by 10 per cent of the service industry. 

“With the pace of change that’s happening at the front-end of the industry in terms of administration, we’re already starting to see some real gaps between those at the forefront and those in general practice who are offering SMSFs as part of a broader strategy, because they’re not taking on board the tech and efficiency gains,” he said.

 “We’ve also been able to see from our survey results that businesses that are three years into that tech footprint are now getting efficiency gains greater than 40 per cent a year. So, the way in which they price their services and deliver their services is certainly changing.” 

Dunn noted the challenge for providers who do not embrace technology will be on how competitive or relevant they will become to existing and potential clients.  

“If you don’t take on board and be conscious of the efficiency gains and how that might influence pricing, you’ll find yourself struggling to remain competitive in that landscape,” he said. 

“It’s going to need to have certain businesses look at the way they offer services, and not to say they’ll be irrelevant, but if they don’t respond to these changes, then they will find it more difficult going into the future.” 

Tax accountants, H&R Block recently set up its SMSF administration division using cloud technology. 

H&R Block director of tax communications, Mark Chapman, said their investment in tech allows their clients to access their fund more efficiently. 

“Our clients can instantly see how their investments are performing and tweak their investments, rather than passing instructions onto someone sitting in an office,” Chapman said. 

“It’s a much more instant solution, more high tech, much easier to use, and more responsive for clients.” 

Licence to SMSF 

Another reason H&R Block entered the space was its prediction that there would be a mass exodus of many accounting firms from the sector.  

“The admin space is an area we’re looking to capitalise on by increasing awareness of a specialised area,” Chapman said. 

“A lot of smaller accounting practices are looking to leave the SMSF space and we’re looking to capitalise on that.” 

From 1 July 2016, accountants wanting to provide SMSF advice will need to hold either a limited, or full Australian Financial Services Licence (AFSL).  

AMP head of policy and technical for SMSF, Peter Burgess believes that this is currently the biggest issue for the sector, as accountants are running out of time to apply for either licence.  

“It seems a lot of accountants are yet to make their move. What we’ll find is that accountants will need to think about their business models if they want to be compliant,” Burgess said. 

“When you’re talking to high-net-worth clients, it’s around asset protection and what type of strategies to protect assets. If you can’t recommend them an SMSF, then you’re limited in the advice you can provide.” 

Slattery also said there were a lot of accountants who had not applied for an AFSL.  

“People need to commit to the rules and so at the moment, we’ve got only a number of accountants who have the exemption. A significant number of our members who are accountants have committed to the licensing regime since early 2004,” she said. 

“There’s a lot of people who haven’t committed yet and unless they meet the rules to engage and advise and service SMSF trustees, then they won’t be able to provide that advice for those services. They need to be aware it takes a number of months to go through the process and to achieve the status to provide advice from 1 July. 

“There are many accountants who have full licences and part licences that are servicing SMSF trustees efficiently, as well as competently. I think that as soon as people realise this efficiency and the high quality of service, the better off the industry will be.” 

Dunn said while the regime change would not impact the number of funds established, the advice given would need to be more thought out. 

“I think the way in which the advice is provided going forward will be more robust, and coming with an advice document it means those that are coming into it are better aware of the roles and responsibilities, risks, benefits and so forth of SMSFs,” he said. 

“One of the things we’ve seen is the fact that more financial planners are actively involved in the establishment of funds, not only for advice but also for setting it up.  

“There might be a period of time when accountants will have their training wheels up and this might initially impact the timeframe of when the funds are set up. But by and large, we won’t see any major change one way or the other.”