The Financial System Inquiry final report has recommended banning most forms of direct leverage by superannuation funds as it creates risks for the financial system and is “inconsistent with the objectives of superannuation to be a savings vehicle for retirement income.”
The Financial System Inquiry panel recommends removing section 67A from the SIS Act. This would retain the limited borrowing on a short-term basis contained in s67, but ban SMSF Limited Recourse Borrowing Arrangements (LRBAs).
Banning superannuation borrowing will “prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly,” and “fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle.”
The Financial System Inquiry panel observes that LRBAs have increased by “almost 18 times” between June 2009 and June 2014. Though limited in recourse these borrowings would likely lead to asset sales in a downturn, “particularly if a personal guarantee is involved.” This would further concentrate the fund investments, reducing diversification.
The GFC highlighted the benefits of Australia’s largely unleveraged superannuation system. The absence of leverage in superannuation funds meant that rapid falls in asset prices and losses in funds were neither amplified nor forced to be realised. The absence of borrowing benefited superannuation fund members and enabled the superannuation system to have a stabilising influence on the broader financial system and the economy during the GFC.
The panel notes that though levels of superannuation borrowing are “currently relatively small,” it could pose a risk to the financial system in the future.
However, “funds with existing borrowings should be permitted to maintain those borrowings. Funds disposing of assets purchased via direct borrowing would be required to extinguish the associated debt at the same time.”
While banning SMSF borrowing the Financial System Inquiry panel does not think that SMSFs should be prudentially regulated by APRA.
“The defining characteristic of the SMSF sector is that trustee members are directly responsible for each fund and must take responsibility for their own decisions.”
For more detail about the other superannuation recommendations in the Financial System Inquiry final report see Financial System Inquiry to reshape superannuation system.
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