Many in the SMSF area probably think that the recent warning from David Murray in the preliminary report from the Financial System Inquiry on borrowing in SMSFs overstates the threat.
“ . . . if allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems,” the report said.
The gearing genie
The worries probably reflect the views of those used to the stricter regulatory approach of APRA, as distinct from the light touch of an over-worked ATO coping with half a million smaller, independent SMSFs.
While the percentage of geared residential properties within SMSFs is still low, continued talk of a property asset bubble will fuel the fears of pessimists, who argue that gearing exaggerates the effects of a downturn in asset values.
(Cynics might think better policy would have been to crack down much earlier on real estate floggers luring some SMSFs into dangerous borrowings.)
In any case, David Murray and his colleagues are serious. They are seeking more comments on their report’s preliminary assessment whether it would be good policy to “restore the general prohibition on direct leverage of superannuation funds on a prospective basis.”
While this is a preliminary draft from the committee, the gearing genie is out of the bottle. Stand by for another furious debate on borrowings by super funds. In the meantime, closing date for submissions to Treasury is September 5.
There is, however, another potential future threat to SMSFs – the report wants to improve the retirement incomes system, which it says in one of the major deficiencies in our system. This view is becoming valid: the FSI report shows that pensions (and not lump sums) paid from super funds have now narrowly taken over as the major outflow.
The main thrust of the report’s discussion seems to be to force future retirees into some sort of annuity or guaranteed income product. This emphasis on institutional products is in contrast to the more individualistic approach of SMSF members.
In raising this point, the report notes that Australia is the only developed country with a mandated super system, which does not have a structured pension framework. The report says this raises worries that retirees will have difficulties coping with longevity risk (running out of money) and other investment risks.
It suggests a range of possible retirement income solutions – improved financial advice, incentives for better retirement income products, some default options or even mandating retirement products in the later stages of retirement.
A pandering to the actuaries’ love of annuities? A rise in the nanny state? An unnecessary interference in people’s rights to make their own decisions? Whatever the reaction, it’s a clear sign that the climate is changing in Canberra.
So it was no surprise that last week, Treasury issued a discussion paper on how to encourage appropriate income products, such as deferred lifetime annuities for retirees. As part of the debate, it also canvassed questions on the minimum payout rules for existing account-based pensions.
After years of neglecting the retirement income questions, it seems there may be movement in Canberra. It will, however, need some delicate footwork to make changes in this area. On one hand, the new products will need institutional backing; on the other hand, the biggest balances are in the hands of SMSFs whose trustees will have their own views on managing their own income.
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