SMSF and the Budget 2020
No one will doubt that 2020 will be historically one of the biggest challenges that the AU economy has ever experienced. With a lot of recovery in the years ahead, the government has a steep learning curve to overcome financial loss and spending, recover, and once again rebuild. As new announcements are reported, seemingly daily, that vaccines will emerge later this year, and into 2021 we are finally at a point where the government and economy can focus on recovery with some end to the economic downfall of 2020 in sight.
So, what does this mean for you, the Self Managed Super Funds and Budget 2020? The AU governments focus for the 2020-2021 budget is to regrow the economy, create job opportunities, and increase domestic spending. Superannuation measures will have their biggest impact on public offer funds and employee super balances on significant employment change will remain secured in the same fund, with cost savings. Underperforming funds will be identified and published, and there is an expectation of higher fund mobility as members switch to better performing funds.
With stability coming in the near future, a well-managed SMSF that focuses on investment and personal objectives provides stability in a volatile economy.
This also begs the question that we’ve seen bounced around, Should SMSF promoters who provide poor advice resulting in financial loss or under-performance be prohibited from taking on new clients until improvements are seen?
So, is this posed question being lodged as a proposal? No, it’s not. Though, we cannot separate ourselves from posing a comparison. That of the government’s 2020 budget reform requiring large super funds to stop accepting new members based on a two-year failed performance test? The governments goal here is to improve the legal obligation of super fund trustees to act ethically and in the interest of their members by legislating a stricter requirement for trustees. Starting in July 2021, super funds failing to pass the new annual performance test officiated by the prudential regulator will be banned from accepting new members. This will be extended to non-MySuper “choice” funds July 2022.
When making these comparisons it is important to note that Self Managed Super Funds (SMSF) is a private super fund that you manage yourself, still under the regulations set forth for SMSFs, these super funds are guided with specific investment objectives for the private individual, whereas standard super funds are managed in respect to large member groups. While SMSF funds have control over the funds being used, MySuper funds are default funds employers utilize as an obligation to turn compulsory super guarantee contributions into super funds. This is done on behalf of employees, though, the critical difference is that employees don’t have the option on which funds the employer chooses to use.
On the MoneySmart.com.au website, the Australian Securities and Investments Commission lists 88 MySuper funds. And, as discussed earlier, in the 2020/2021 budget proposal there are a significant number of poor performing default funds accepting super fund contributions. By July 2021, those same funds will come under tighter scrutiny after two consecutively failed annual performance tests.
Two obvious consequences arise from this. The first is that MySuper funds will not be able to take on new members. Secondly, the underperforming MySuper fund will need to notify current members that the performance of the fund is not up to par. As it currently stands, funds are not under obligation to notify members of underperforming funds. For long-standing members not used to this notification, this will certainly attract negative attention potentially driving undesirable changes for that fund. This is where it is expected to see higher fund mobility as members move away from under performing funds to funds performing well.
For members switching from under-performing to well-performing funds can be the difference of retiring with tens of thousands of dollars more than had they stayed with the under-performing fund. The government reform is seeking to convey a clear message, and that is that even in compulsory super benefits, the minimum that many members accumulate, switching to a well-performing fund can result in over $50,000.
With additional strategies such as contributing more than the minimum, now 9.5% of gross salary, members could make considerably more. Add those same savings, above the compulsory minimum, to an underperforming fund and you can understand the severity of financial loss, or at a minimum slow recovery.
As the 2020/2021 budget and the relevant super fund reforms come into effect, the question that many funds will be faced with is, will members actually switch their super fund from an underperforming to a well-performing fund? The mobility that is expected is purely based on financial analysis and does not take into effect the reluctance for people to change, especially in a year fraught with devastating changes. Normality, even at a financial loss, is something may people will still cling to. Additionally, we must remember that until the 2021 reform in July, many fund members likely knew little of the investments in their funds. It is quite possible that a reluctance to change without personal knowledge of super funds will exist.
It is important to be prepared as you move into 2021, especially considering the large number of fund members who will be facing potentially underperforming funds. The same preparation and concerns should be adapted by people considering Self Managed Super Funds and the 2020 budget and how they impact each other. While Super Fund members must consider underperforming funds, SMSF members must be concerned with inappropriate advice resulting in the loss of money.
While SMSFs may not face the same reforms as other super funds, it is important to evaluate similar consequences as a comparison of underperforming funds and inappropriate advice regarding your SMSF. Both can result in the same: financial retirement loss.
This is an opportunity to take control of your SMSF and even consider, if relevant, how long your SMSF has been running on poor advice from long-standing adviser relationships. With good advisers you can watch and see how things play out, knowing you are in a good place. With poor advisers, you must ask yourself, does my SMSF adviser relationship still maintain the value to achieve my long-term goals?