The twin threats to self-managed super

Two major hazards could damage the self-managed super fund movement — scam property funds and the Labor Party.

Australians have voted with their feet to get into self-managed super.

Many years before the superannuation scandals were revealed by the royal commission, large segments the Australian community knew that something was wrong with the way big superannuation was operating.

They didn’t have a Michael Hodge QC peeling back the details but whether it be retail or industry funds, disclosure was poor and the stories about how hard it was to transfer money or be paid were regular barbecue topics.

And so, almost a third of Australia’s superannuation money is now managed in self-managed funds and around half of those in self-funded retirement manage their savings via their own funds.

While the Australian community voted with their feet, it hasn’t been an easy journey.

The big superannuation funds got into the ear of both sides of politics and misled the politicians about self-managed funds, causing our elected representatives to dream up all sorts of nasties to curb them.

But that didn’t work because the population feared something was wrong with the big funds.

Even in the industry funds, where there have not been the same sort of problems as we have seen in the bank-owned funds, they did not have good retirement products and their level of disclosure was very poor. Accordingly a large number people who had saved for retirement through industry funds set up their own funds when they reached retirement.

The Australian community was helped by an accounting profession that showed their clients how they could operate a small fund efficiently and cheaply. What made it easy to comply with ever-increasing rules was the fact that the politicians were trying to protect self-managed fund members from themselves ---the members were the trustees and so, unlike many big funds, they looked after their own interests.

Now the self-managed fund movement is beginning to move to the next stage where children are being invited into the family fund. To the great credit of revenue minister Kelly O’Dwyer, the current government has increased the amount of people that can be members of a self-managed fund from four to six, to help the family transfer process.

There are two major hazards that are set to damage the self-managed funds movement.

The first is that a large number of funds have been set up to buy residential properties with high gearing. For some high income people this can be an advantageous strategy. But high pressure sales people, incentivised by huge commissions, got into the act and sold apartments at inflated prices to self-managed funds.

In many cases they actually had people setting up new funds to borrow the money and buy the apartments. There could be some big losses in this area. But these scam funds are only a small part of the total movement.

The second threat comes from the ALP, which is trying to help its mates in the industry funds by attacking self-funded retirees using self-managed funds. The ALP plans to remove franking credits from those self-managed funds with sufficient money to self-fund their own retirement. It’s telling them if they want to keep their franking credits they must join an industry or retail fund. The measures are carefully crafted so that the ALP is not attacking those that have substantial sums in superannuation. It is the battlers that they want to push into industry funds. It is absolutely outrageous and represents the best chance the Coalition has of being re-elected at next year’s election.

There is very little money to be raised. The ALP claims the attack of the battlers in self managed funds will yield billions but most people in the superannuation movement believe the ALP is using estimates that are simply wrong and do not take into account the Coalition superannuation tax measures that started last July and changed the game. It’s possible the ALP are using fictitious estimates to fund electoral promises.

My guess is that the Coalition has not understood the intense anger in Middle Australia who see that their friends and relatives who funded their own retirement are being discriminated against. They believe it is about the ALP helping mates and not about money raising. But the ALP’s mates in the industry funds do not need help.

There is no doubt that the problems in the retail superannuation funds will send a lot of people into industry funds but they will also cause a new generation of people to look more closely at self-managed funds as their favoured savings vehicle.