How SMSFs are weathering the COVID-19 storm

In the three years leading up to the Global Financial Crisis (GFC) in 2007/08 the rate of growth of self-managed superannuation funds (SMSFs) was the talk of the industry. It was, by almost any measure, phenomenal.

In the five years to 2009, the SMSF sector had grown by an average 20% a year making it hardly surprising that both retail and industry fund executives were becoming restive about such growth levels.

However, that 20% growth rate took a momentary hit during the GFC, albeit that momentum was resumed reasonably quickly thereafter. The question in 2020 is whether COVID-19 pandemic is having a similar impact?

The 20% per annum growth rate in SMSF establishment leading up to the GFC has definitely not been maintained, but nor has the SMSF sector fallen away in terms of its relative scale in the superannuation industry.

According to the latest available data compiled by the Australian Prudential Regulation Authority (APRA) total superannuation industry assets were $2.9 trillion as at 30 June, 2019 and, of this total, $1,924.8 billion were held by APRA-regulated superannuation entities and $747.6 billion were held by SMSFs.

Assets of superannuation entities

The bottom line of the APRA data is that, while the momentum of SMSF establishments has tapered off somewhat over the past decade, the level of assets within SMSF funds has continued to grow, albeit not as quickly as those of APRA-regulated funds.

The explanation for this is simple and has remained unchanged for more than a decade. To quote an Australian Taxation Office (ATO) analysis published in 2009 – “Compared to members of other types of superannuation funds, SMSF members are, on average: older; earn a higher income; and have larger superannuation balances”.

“SMSFs hold a majority of their assets directly; with nearly 60% of assets held in cash, term deposits and Australian listed shares. SMSFs are exposed to little direct overseas investments,” the ATO’s 2009 analysis said.

In the intervening decade little has changed in terms of the asset allocations of SMSFs, although there is evidence that in 2020 there is more exposure to overseas investments via managed funds.

SMSF Association chief executive, John Maroney, is alive to what the SMSF sector experienced during the GFC and is paying close attention to what is evolving during COVID-19, but it is not what might be expected.

“Interestingly, for the first time in several years the trend of declining SMSF registrations has reversed this year,” he said. “The number of SMSF registrations received between July, 2019 – December, 2019 was 11,558. This compares with 10,954 SMSF registrations received for the same period in 2018, representing an increase of 5.5% in registrations.

“SMSF registrations for January and February 2020 were 3,246 compared with 2,807 SMSFs registered during the same period last year. That is an increase of 15.6%.”

Maroney said early indications suggested SMSF registrations had surpassed March, 2019, by 6% (registrations to 25 March, 2020).

“This confirms there has been a spike in registrations following the COVID-19 outbreaks,” he said while noting that there had actually also been a spike in SMSF establishments shortly after the GFC, as shown in Table 1 overleaf. 

Industry veteran and managing director of Heffron SMSF Solutions, Meg Heffron, said that, rather than seeing a repeat of the GFC slowdown which impacted SMSFs, she believed the opposite might actually be occurring.

“I think behaviour lands in one of two camps during a crisis,” she said. “a) Bunker down, make no changes and hope it all passes soon (which would slow SMSF growth) or b)

Look at the carnage and take it as a wake-up call that there has never been a more important time to be engaged.  Engagement usually spawns a desire for control and that’s exactly what SMSFs are all about.

“So far, we’re seeing a lot of ‘b’. Elsewhere there may also be a lot of fear and trepidation that stops SMSF creation but we’re not seeing it yet.

“Weirdly, it’s even reminded people of the benefits of SMSFs in terms of being nimble. For example, we had our first ATO determination for a fund where the member asked for the $10,000 early release. He’s been approved and received the ATO notice in the morning. By lunchtime he had the money – the notice allowed him to transfer $10,000 from his fund to his personal account and, as it’s all with the same financial institution, it was instant,” she said.

“This is a guy that has been relying on friends to help him feed his kids – today, he could go shopping with his own money. I wonder how long he would have had to wait before a large fund could pay him?

“Similarly, people at the other end of the spectrum – where downturns in markets give them opportunities – have been able to act immediately with new strategies. That just reminds them of why they want an SMSF,” Heffron said.

However, she also urges a note of caution befitting uncertain times.

“All that said, my personal view is that the worst thing to do right now is to dive into anything, be it setting up an SMSF or changing to any other kind of fund.  If an SMSF wasn’t right for you three months ago, why is it right today? I think the fear of market falls, uncertainty etc. sometimes makes people react too quickly rather than carefully considering their options like they would in normal times. 

“That might be absolutely fine (and in fact a good thing) where it prompts people to take bold steps in changing something within their business or getting into new

products/revenue lines because others have dried up, it might be a great trigger for a lot of genuine innovation. But it’s not a good thing when it comes to making long-term retirement planning decisions like ‘should I have an SMSF’,” she said.

“Of course, I think everyone with super should at least think about an SMSF and far more people should have them than do at the moment. But it’s like marriage – totally wonderful thing to be entered into in a considered and careful way.”

EARLY RELEASE

As mentioned by Heffron, people may be members and trustees of a self-managed superannuation fund but that has not precluded them from accessing the Government’s $10,000 hardship early access regime.

The SMSF Association’s Maroney acknowledged it did not have any hard data on the issue, and suggested the traditional member demographic was such that it was unlikely to be significantly widespread.

However, he acknowledged that SMSF trustees who were also running small businesses might be a different proposition.

“There will be some SMSF members with small businesses who may need to access superannuation to deal with cash flow concerns,” Maroney said.

Heffron said there was no question that her firm had some clients who either had or would seek early access.

“Which just goes to show how massive and widespread the impact of this pandemic is – you’ve got to remember that a lot of SMSF members are small business owners whose source of income has just dried up,” she said.

“From a personal income point of view, they are in every bit as tough a place as someone who lost their job. We also have highly paid young professionals who have both lost jobs, have large mortgages etc.”

Having said that, Heffron said that she expected most SMSF members would not need to access their superannuation “because they have some personal wealth behind them and obviously the retirees don’t need this to access their super”.

“A lot of our client base is in pension phase,” she said.

“Obviously the economic impact of the pandemic has put a large dent in a lot of people’s retirement savings so SMSF balances have fallen considerably – so there’s an obvious impact on the most important people in the industry, the trustees themselves.

“The SMSFs that own property are also hit hard by the relief they need to provide to residential and commercial tenants. COVID-19 has really brought home one of the real challenges of having your retirement savings tightly coupled to your business (e.g. owning the property that the business rents) – in that rough times for the business translates directly into a rough time for the landlord (the SMSF),” Heffron said.

“Having said that, the SMSFs with property leased to third parties are also in a hugely tough place.  The State and Federal Governments have been quick to dive in and mandate some rent relief and support for tenants during the pandemic which – on one level – totally makes sense,” she said. 

“But it’s done on the assumption that the tenant is economically weaker than the landlord. That’s just not always the case – in an SMSF where a property is a major asset, allowing the business or residential tenant to just ‘not pay rent’ quite possibly means the retiree trying to live on that income is completely screwed.  They may end up being even more damaged than the tenant.”

AND WHEN THE PANDEMIC IS OVER?

Heffron believes that when the pandemic is over and the dust has settled, the SMSF sector will need to be alert to the consequences of the large and rapid policy measures the Federal Government put in place.

“The SMSFs themselves and Australia generally are clearly going to have to pay for the stimulus one day,” she said. 

“Sadly people who have accumulated wealth are often soft targets here and that’s the SMSFs. The attack on franking credit refunds will make a re-appearance as will capital gains tax (CGT) and superannuation tax concessions I suspect.

“Certainly our income tax base is too narrow to fund it via income tax increases and while I love the Government’s optimism that we will grow our way back I think there will need to be a helping hand.

“I just hope the Government takes this as an opportunity to make some sustainable changes rather than just tinkering at the edges or attacking soft targets. Some reform on the tax and social security treatment of family homes, rationalisation of taxes that are anti-jobs (e.g. payroll tax), bite the bullet and think about raising GST etc,” she said.

Maroney said the SMSF Association had been advocating strongly on behalf of members, particularly to the ATO, on issues arising because of COVID-19 and had been pleased with the hearings it had been receiving. 

“As an example the Government positively responded to our request to reduce the minimum requirement for pensions for the 2019/20 and 2020/21 financial year,” he said.

“We are currently exploring further positions to take to Government but with the uncertainty surrounding the financial impact of the COVID-19 pandemic, potential areas of concern are changing rapidly.

“The Government has an opportunity in May to legislate for the extension of measures which will allow more Australians to contribute to superannuation as announced in last year’s budget. We also think this may be a good time to extend that legislation to repeal the work test to allow more Australians top-up their retirement savings after the negative impact of COVID-19.” 

SMSF population - annual data