Superannuation’s best interest: sort this mess

Our super system is riddled with anomalies that allow big funds too much leeway and SMSFs too little wriggle room.

There are more than a million people involved in SMSFs.

Just now, a most curious case is making its way through the legal system: 24-year superannuation account holder Mark McVeigh has decided to go up against $57bn retail industry fund REST in the Federal Court.

You might call it a “David and Goliath” story or you might call it daft. But McVeigh believes his fund has not done enough to offer evidence it is acting in his best interests on climate change risk. There is no doubting the sincerity of McVeigh’s claim — he is not looking for money, says his lawyer David Barnden, though he does have a string of anonymous backers ready to support him on any costs he might face in the future.

No doubt, there will be costs, as the young litigant is using former judge Ron Merkel QC, who would not come cheap.

The outcome of the McVeigh case is impossible to guess because the principles that underpin our super system, such as a fund acting in your “best interests” or super money being used for the “sole purpose” of improving financial outcomes, are open to interpretation, not to mention abuse.

There are screaming inconsistencies that allow big funds to play all sorts of games, while arbitrary rules repress the ability of self managed funds to succeed. If nothing else, this unlikely case might blow open some of these nebulous notions, and that would be a good thing.

Here are four flaws in superannuation that the courts and a string of current inquiries should look at:

The slippery definitions of ‘growth’ and ‘defensive’

When we read about which funds had the best results, the performance figures are based on the announced percentage returns made by that fund during the year. Yes, the majority of people are in balanced funds, but every fund is free to use a different definition of defensive and growth inside that broad “balanced” category. As a result, the fund that classified a bunch of aggressive investment moves into its “defence” category is going to do better than the fund that strictly classifies defensive moves according to textbook definitions of cash and fixed interest. Put simply, we are not comparing apples with apples and if we were, the performance charts would look very different.

The definition of “best interests”

Among McVeigh’s claims against REST is that the fund breached its duties to act in his best interests. If the courts examine this notion of best interests, it will open a can of worms.

There is a trend towards marketing super as if it was interchangeable with any other consumer good, such as wide-screen TVs or plunge pools, yet super should be for the sole purpose of bettering your retirement income. For example, recently AustralianSuper, the biggest fund in the land, offered frequent-flyer points to new members.

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The fund somehow justified this to regulators with the wacky logic that if it won more members through promo schemes, its costs would come down, and that would be in members’ best interests. This is nonsense. It means best interests can be bent anyway it suits any super fund. It’s also a reason you can’t dismiss the McVeigh case because the precedents here are so random anything might happen.

The concept of “sole purpose”

If you really want to see how contradictory and occasionally pie-eyed it all gets in superannuation, consider this: Domacom is an innovative investment company that recently won a landmark tax ruling that allows a self managed super fund to hold property in which relations of members of the fund can live. In other words, mum and dad can have their kids in a house paying rent that flows back to the SMSF.

This has always been banned under the sole purpose test. Under this landmark Domacom ruling, it is allowed if mum and dad do this through one of Domacom’s sub funds. So we get this bizarre workaround and it’s OK.

Huh? Why can’t an SMSF have related parties in a property if they pay market rates?

The lack of allocation guidance

There are more than a million people involved in SMSFs. If they lose money in investment schemes, they are not protected in the same way that members of larger funds have a compensation scheme to access. Yet, there are few rules and no guidance whatever on how they can invest their money — only the odd exception, such as they cannot buy property and rent to their kids at market rates.

If you wish, your SMSF might have one-third of your life savings in crypto, one-third in vintage clocks and one-third in a single gold mining stock. I use this wildly inappropriate asset allocation plan strictly to point out the weakness of the current system.

We spend a lot of time talking about whether super should be compulsory, or whether the proliferation of accounts can ever be resolved.

But key questions that really matter in super are impossible to answer: How is the money made? Which funds actually do the best on a like-for-like basis? Is the system fair to all concerned?

The McVeigh versus REST case might shine a light where a string of recent inquiries has failed.