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Table of Contents
Table of Contents 2
Introduction 3 1.0
SMSF –Typical Asset allocation 4 2.0
SMSF-Risk 6 3.0
Conclusion 8 4.0
Self-Managed Superannuation Fund is a kind of superannuation scheme that is set up to provide income for the members of the scheme (Antolin et al 2009). It is a trust fund where the fund beneficiaries are also members of that fund. It must exist solely to provide retirement benefits to members only. An SMSF fund is set up in a way such that it can only have four members and in most cases, it consists of couples. Since the completion of the Walli’s inquiry in 1997, the assets of Superannuation assets and shares have more than doubled and by December 2013, it was 100% double (Ashcroft 2009). This increase is because of many factors, which have resulted into the growth of the sector and the fund in specific. Some of the factors include the tax incentive adopted by the Australian government, compulsory SG, and the drastic changes in the retirement’s lifestyle expectation (Ashcroft 2009). In the superannuation industry, in Australia, self-managed superannuation is the fast growing segment. In the year 2013, the fund was around $ 500 billion in assets only, and that composed of over one third of the total industry assets that currently stands at over $ 1.6 trillion that is an increase from 19995 from 9% to 20% equivalent to 30% increase in the real GDP (ABS 2013). The figure below shows the growth in SMSF.
It can be noted that the Superannuation system changed for as long Period and a drastic shift away from DB scheme towards DC scheme, with most of DB schemes shares moving downward (Antolin et al, 2009). The decline in the DB scheme has coincided with the decline with the shares of Superannuation funds held by the public sector has most of the shares are currently owned by private investors (Antolin et al 2009).
2.0 SMSF –Typical Asset allocation
The asset allocation of Australian fund normally reflects their effort to try to balance return, risk and liquidity requirements. Equities accounted for the largest percentage of Australian Superannuation assets while others constitute smaller percentage (Ashcroft 2009). The fund has lower allocation to fixed income than most OECD counterparts do. The lower allocation is motivated by low demand from funds, given that Australia bond market is in line with a number of other OECD countries. The investment is also characterized with low risk return and liquidity on non-financial corporate bond that are on offer in the market (Ashcroft 2009).
SMSFs if compared with other types of funds have a larger share of cash investments that includes deposits but have negligible share of debt securities. Given that cash investment and other fixed income investments may be considered substitutes, this fund asset allocation may reflect the ease of investments in cash and term deposits compared with debt securities. The SMSFs mostly invested in active equity as opposed to passive equity (Ashcroft 2009).
With SMSFs funds, domestic equities are the most popular investment choice for SMSFs, accounting for around one-third of their total assets (Ashcroft 2009). SMSFs hold smaller share of their assets in foreign equities, their direct holding of foreign equities are negligible and the total exposure of their asset class is likely to be quite small compared with other funds.
The introduction of the law that allows employees to choose the fund that their employers can deposit their contribution and the fund they can use has assisted the employees to choose SMSF (Ashcroft 2009). This law has also made it more flexible for the people to choose SMSF contributing to its rapid growth in the past decades. The choice of the benefit payments also played a crucial part in the growth of superannuation fund and asset (Ashcroft 2009). If the benefit payments were taken as a form of an account-based income stream, then the assets will stay longer on the superannuation system while the benefit taken as a lump sum payment which will remove the asset from the system quicker. Since the introduction of this law, many have chosen income stream, benefit payment, as opposed to lump sum payment hence increasing the asset growth (ABS 2013). For SMSFs, almost 70% of the benefits payments are in the form of the income stream whereas for other funds, income stream currently account only 40% of the total benefit payments. As a result, the share of superannuation assets held in MSMSFs increases, then it is likely that the proportion of benefit payments taken as an income stream will also automatically continue to increase explaining high growth rate in superannuation funds (ABS 2013).
In July 2007, the law that simplified the superannuation fund came into effect. This law majorly eliminated the taxes that were payable on the retirement benefits, and this encouraged many people to save more and more since their savings were not subjected to any tax. The tax was eliminated from members who were 60 years and above (ABS 2013). The legislation further introduces the cap on after-tax superannuation contribution. The law set it at $ 150,000 above which the normal contributions are taxed and are at the top of marginal tax rate (ABS 2013). During the transitional period, the legislation also allowed individuals to make a contribution of up to $ 1 million in after tax contribution. The legislation came as a reprieve to the members and a motivation, as a result; there was drastic in member’s contribution to SMSFs in 2006- 2007 and the assets in the sector shifted upwards. SMSFs also hold a relatively large share of their assets in property (ABS 2013). Direct property holdings account for around 15 per cent of SMSF assets and SMSFs are also likely to have a small share of indirect property holdings through trusts and managed funds (represented by the ‘Other’ category in. The bulk of these holdings are in commercial property (77 per cent), likely due to a range of incentives for small businesses to hold property through an SMSF (Ashcroft 2009).
Another main driver of superannuation asset growth since the inquiry has been individual contribution to the fund something which has exceeded the investment own earnings. Like other countries, both the compulsory and voluntary superannuation contribution receives a fair tax treatment, and this has influenced the inflow of cash into the fund (Ashcroft 2009). For a contribution by APRA, the employer SG has mostly influenced regulated funds, individual’s contributions. While for SMSFs, voluntary contribution has driven the asset growth more so during the transition period up to the time when the simpler Superannuation system was introduced (APRA 2014)
The resulted effect of the contribution on the superannuation asset growth is partly offset by the benefit payments. Before the introduction of a simpler Superannuation system, there were several restrictions on the amount of benefits that could be paid by people at the concessional tax something, which hinders the growth of assets of the funds. In the year 2007, the Restrictions were removed, therefore, eliminating the tax that were payable on the retirement benefits from the tax source (Ashcroft 2009).
Despite the importance and immense contribution of SMSFs, the fact that the pool of superannuation funds and savings is so large and is the main source of funding to other sectors of economy, the superannuation system should be carefully monitored and controlled by the federal government through relevant monetary policies and legislation (APRA 2014). This is because the fund is exposed to liquidity risk, compliance risk and market risk, though to a lesser extent compared to banking sector (APRA 2014). Liquidity risk may also arise because of the social fund members shifting their asset allocation simultaneously and sometimes withdrawing their fund due to shock in the asset market. Political instability may cause market risk in the superannuation system and result into the loss of fund. Other risk may include inflation risk and economic risk (ABS 2013).
The resulted effect of the contribution on the superannuation asset growth is partly offset by the benefit payments. Before the introduction of a simpler Superannuation system, there were several restrictions on the amount of benefits that could be paid by people at the concessional tax something, which hinders the growth of assets of the funds. In the year 2007, the Restrictions were removed, therefore, eliminating the tax that were payable on the retirement benefits from the tax source. This may result into other inherent risks that include compliance risk affecting the general stability of economy. The legislative factors and the growing number of individuals setting up the SMSFS as a vehicle to invest in property are the major contributing factors and the momentum that are geared to property investment through SMSFs. The conducive investment environment and increase in investors’ confidence, in the fund has led into the rapid growth of the fund. The growth is estimated to continue in the unforeseeable future with more relax rules and regulation in the sector.
Antolin P, S Schich (2009), ‘The Economic Impact of Protracted Low Interest Rates on Pension Funds and Insurance Companies’, OECD Journal: Financial Market Trends, Volume 2011 – Issue 1, pp 1–20.
Ashcroft J (2009), ‘Defined-Contribution (DC) Arrangements in Anglo-Saxon Countries’, OECD Working Papers on Finance, Insurance and Private Pensions, No 35.
ABS (Australian Bureau of Statistics) (2013), ‘Deaths, Australia, 2012’, ABS Cat No 3302.0, November
APRA (Australian Prudential Regulation Authority) (2014), Superannuation Trends, January Available at <http://www.apra.gov.au/Super/Publications/Documents/Superannuation-Trends-PDF.pdf>
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