Cavendish, the SMSF administrator, has argued for a number of changes to LRBAs rather than a ban on SMSF borrowing, in a submission to the Financial System Inquiry.
Cavendish draws a distinction between “traditional style” borrowings and the limited recourse borrowing arrangements (LRBAs) of SMSFs. “These differences mean the level of systemic risk posed by direct SMSF leverage is not the same as the level of systemic risk posed by direct leverage outside of superannuation,” said Cavendish.
“Given the legislative restrictions imposed on LRBAs and the conservative lending practices of the major financial institutions, we don’t believe the systemic risk posed by leveraged investments outside of superannuation is comparable to the systemic risk posed by LRBAs,” said Cavendish.
KPMG has questioned the need for a ban on leverage in SMSFs, saying “issues associated with SMSF leverage can be overcome or mitigated through effective financial advice, clear and concise guidance materials, and through a robust annual audit”. This is one of KPMG’s recommendations in a second submission to the Financial System Inquiry (FSI).
Instead of a ban on SMSF borrowing KPMG thinks there are a number of measures that could reduce the risks associated with leverage in SMSFs, including:
- a focus on advice relating to SMSFs, to check recommendations to set up SMSFs are appropriate
- additional guidance by APRA in relation to credits risks where SMSFs may be “borrowing to purchase poor quality assets”
- expanding protections under the Australian Credit Law to LRBAs
QIC has recommended changes to the portability rules for superannuation to the Financial System Inquiry, as it would enable funds to make more illiquid investments.
“The superannuation system dominates Australia’s pool of savings but has a lower allocation to bonds (fixed interest) than the retirement saving systems of other comparable economies,” said the submission to the second round of consultation by the inquiry.
QIC says this is due to a number of factors, including the “predominantly defined contribution nature of the Australian superannuation system” and the portability rules for superannuation.
CAANZ, the Chartered Accountants of Australia and New Zealand, previously know as the ICAA, have recommended a review be conducted into SMSF borrowing and argued against placing limitations on setting up SMSFs, in a second submission to the Financial System Inquiry.
“We have long supported and encouraged a review of direct borrowing by superannuation funds,” said the submission.
“We encourage the Inquiry to recommend a comprehensive review of borrowing within superannuation”
CAANZ says it is “not too late” to review the area, and rejects arguments that a review is not required due to “relatively low levels of take-up” of Limited Recourse Borrowing Arrangements (LRBAs). Instead this reflects the “timeliness of a review to determine whether borrowing is appropriate or not before it becomes widespread”.
Deloitte has argued that SMSFs should be banned from using direct leverage, in a submission to the second round of consultation by the Financial System Inquiry.
“The primary objective of superannuation is saving for retirement,” said Deloitte in the submission. However as APRA-regulated funds only use limited leverage, “allowing SMSFs to use direct leverage creates competitive non-neutrality in the system”.
“A general prohibition of direct leverage on superannuation funds would still allow individuals to use leverage on their personal, non-compulsory, and non-tax-advantaged savings,” said Deloitte.
Super funds, industry groups and unions have attacked the further delay in increasing the superannuation guarantee from 9.5% to 12%, and the only temporary reprieve for the LISC.
The deal between the government and senators, including the Palmer United Party, will hold the super guarantee rate at 9.5% until 1 July 2021, with it reaching 12% from 1 July 2025.
“The implementation of a measure, which will significantly reduce the retirement savings of a large number of working Australians, is very disappointing,” said AustralianSuper Chief Executive Ian Silk. He went on to say that “this move, at a time when the issue of adequate retirement savings is one of the key economic challenges faced by the nation, is counter-productive and will damage confidence in the superannuation system”.
The Actuaries Institute have said that Clive Palmer was wrong when he said more than 50% of Australians will die before they can access their superannuation.
This follows from a deal the government made with senators, including members of the Palmer United Party, to repeal the Minerals Resources Rent Tax and further slow the rate of increase in the superannuation guarantee.
Talking about the deal Mr Palmer has been variously quoted as saying that up to 50% and more than half of Australians would die before they accessed their super.
In response the president of the Actuaries Institute, Daniel Smith, has said that this statement was incorrect.
In response to the changes made by the Government to further delay the increase in the superannuation guarantee to 12%, former Prime Minister Paul Keating said:
“Yesterday’s decision represents nothing other than the wilful sabotage of the nation’s universal savings scheme. And sabotage for reasons only of prejudice.”
According to Keating a superannuation guarantee rate of 9.5% over 35 years for someone earning between $ 100,000 and $ 150,000 will provide 50% of pre-retirement income in retirement. “This is way below the 70% of pre-retirement income replacement a Superannuation Guarantee at 12% would provide,” said Keating.
While arguing that SMSF borrowing should continue to be allowed, SPAA has said that personal guarantees be restricted, along with related-party borrowings, and LRBAs be moved under the AFSL regime. These are some of the recommendations that SPAA has made in the second submission to the Financial System Inquiry.
“We do not believe that direct gearing through the use of LRBAs is occurring in an excessively risky manner that may create vulnerabilities in the superannuation and financial systems,” said SPAA.
“The prevalence of SMSFs having only one asset which has been acquired through an LRBA is very low, which adds additional support that LRBAs in general are being used appropriately by SMSFs to ensure there is diversification of assets held by the fund”.
NAB has used its submission to the second round of consultation by the Financial system Inquiry to argue for changes to how super funds report to members.
Current reporting by super funds to members focuses on the account balance, according to NAB this “creates an ‘investment’ mindset rather than an ‘income’ mindset”.
Instead, “NAB supports shifting the focus away from accumulated account balances to one which focuses on projected retirement outcomes via regular member reporting”.