Productivity Commission’s SMSF findings “fundamentally flawed”

The Productivity Commission’s draft findings on SMSFs are “fundamentally flawed” due to problems with the data, and so shouldn’t lead a recommendation of a minimum balance for SMSFs, says the SMSF Association.

The Productivity Commission’s draft findings include that SMSFs with higher balances were competitive with large super funds, but SMSFs with under $1 million in assets perform “significantly worse” – mainly due to higher average costs.

“Factors such as data problems, investment return calculation methodology and the retirement demographics of SMSFs compared with APRA-regulated funds make it unreasonable for the Commission to conclude from the data they used that SMSFs are not cost-effective with a balance below $1 million,” says the SMSF Association.

The Association’s submission to the Productivity Commission says the ATO’s SMSF statistics are “questionable” – particularly around costs and returns. Issues with the statistics are “exacerbated” by differences in methodology between the ATO and APRA.

The SMSF costs data is also distorted by the inclusion of establishment costs and insurance.
The Association says including SMSF establishment expenses in annual cost calculations is “myopic and distorts SMSF cost and return data”. Including insurance in the operating costs of SMSFs, when it isn’t included for APRA funds, is also distorting.

“Furthermore, another significant issue in comparing investment returns, especially at a sector level, is that SMSFs have a significant proportion of members in retirement phase compared to APRA-regulated funds which can distort comparisons,” says the submission.

The SMSF notes that the Productivity Commission acknowledged in the draft report there are issues in comparing APRA and ATO statistics.

The SMSF Association (SMSFA) also wants the Productivity Commission to consider the “varied motivations” of SMSF members, including increased control and individual retirement goals.

“Simply comparing investment returns between SMSFs and other superannuation funds does not acknowledge or account for the other benefits that SMSF members receive from their funds.”

“We believe that these data problems make it difficult for the Commission to appropriately make a finding that SMSFs are not cost-effective with a balance below $1 million and should not lead to a minimum balance for SMSFs being recommended.”

“The SMSFA does not support the introduction of arbitrary barriers to establishing an SMSF as they would inhibit consumer choice and flexibility within the superannuation system. We believe individuals must be given the ability to engage and manage their retirement savings in ways that suit their retirement goals.”

Class finds “gaps” in Productivity Commission

Class Ltd – which makes Class Super – has also made a submission to the Productivity Commission, finding “gaps” in the draft report.

Class says the Commission’s report is “well researched”, but “fails to hit the mark on SMSF performance”. Though this “isn’t a reflection on the quality of the Commission’s work, however it is a stark reminder of the inherent differences between how APRA and ATO report fund performance”.

As with the SMSF submission, Class points out that the ATO includes contributions tax and insurance in net earnings statistics – which APRA does not.

“Class analysis of SMSF performance across 5 years shows that although funds with smaller balances do generate lower returns, the variance is considerably less than the exaggerated results provided in the draft Report,” says Class, which has released its submission.

“The Productivity Commission notes in numerous places that the ATO’s ROA and APRA’s ROR are not directly comparable – however it then proceeds to do so anyway,” says the submission.

“We do not accept that data collection differences between the ATO and APRA mean that an ROR cannot be calculated and compared for SMSFs,” says Class, setting out a method to do so.

“It should be acknowledged that the ATO and the Commission are largely working with the data they have available, and that the issues we highlight in this submission do not appear to be due to policy or error, but simply due to misunderstandings and/or lack of a full consideration of the impact of some of the choices made, and differences in the methods employed by the ATO and APRA.”

Class CEO Kevin Bungard said: “It appears that the advice the Commission got from the regulators was that it is ‘too hard’ to compare the performance of APRA funds against SMSFs – which is disappointing, given the dual regulators are responsible for an industry worth over $2 trillion. The Class analysis highlights how significant the different approaches to performance reporting really are.”

“It’s time that the two industry regulators start to actively collaborate to deliver accurate insights into like-for-like fund performance.”

Bungard said that Class “wholeheartedly” agrees with recommendation 22 of the draft report – the creation of a superannuation data working group.

The due date for the Productivity Commission’s final report is currently shown, on its website, as “TBA”.

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