Mercer actuary David Knox says the data used to determine the old age dependency ratio is “totally out of date” and overstates the severity of the problem.
From their inception, SMSFs have always attracted more than their fair share of criticism. Now it’s an ageing membership that’s being used to restrict their numbers.
SMSF trustees avoid retirement income mandate
Draft legislation for the impending ‘Retirement Income Covenant’ was released this week, with SMSF trustees no doubt breathing a sigh of relief after being exempt from the new law. The change in legislation will require all APRA-regulated funds, specifically industry and corporate super plans, to develop and implement a retirement income strategy for those who are retired or nearing retirement.
Building a consistent retirement income has remained the biggest challenge facing the superannuation industry, but particularly industry funds, who typically have a younger member base, predominantly in accumulation phase and still contributing. Yet with the Baby Boomer generation transitioning into retirement, the Government was forced to act.
The SMSF Association, Australia’s leading SMSF body, gave its support to the decision to exempt SMSF’s from this new requirement, after raising concerns that it would introduce ‘additional cost, red tape and unintended consequences’ to the millions of SMSF trustees around Australia.
Whilst avoiding another layer of regulation is no doubt a positive, it doesn’t reduce the need for all investors, but particularly those managing their own retirement capital, to have in place a detailed and implementation investment policy. These aren’t the investment policies that have dominated SMSF tax returns for many years, but closer to professional, detailed guidance documents.
SMSFA’s CEO John Maroney agrees with this view, saying “just because the law doesn’t require you to have a retirement income strategy, doesn’t mean you shouldn’t have one.
“It’s not a green light for SMSF trustees to ignore the spirit of a retirement income covenant, as we know from bitter experience that failure to properly address these issues can derail even the best laid retirement income plans.
According to Maroney: “The exposure draft legislation, by outlining the different matters and risks that APRA regulated fund trustees should address in relation to maximising the expected retirement income of members, can act as a useful action plan or blueprint for SMSF trustees.
Most financial advisers couldn’t agree more with this sentiment. For that reason I have taken the opportunity to identify six key issues SMSF trustees should be addressing as part of their annual compliance and building an investment policy.
- Purpose and timeframe: Trustees should regularly ask themselves why am I running an SMSF? Is it because they don’t trust larger institutions, prefer control and wish to invest in line with their own investment beliefs? Whichever it is, it is imperative that you understand your purpose and ultimately your objective return. Are you seeking to beat the average ‘balanced fund’ or is income all you are worried about? This all needs to be address in any investment policy.
- Reporting: Running your own SMSF comes with significant responsibilities, but outside of annual taxation reporting there is no requirement to track your performance of compare it to the alternatives. In my experience, regular performance reporting, whether quarterly or six monthly can lead to more informed decision making and strong performance. In this case simply looking at your dividends or total value each year isn’t enough, rather trustees should be leveraging the many performance tools to understand the risks, comparative returns and weightings in their portfolios.
- Disciplined reviews: Following on from the need for consistent performance reporting is completing formal and disciplined reviews. The most successful investors in history all have one thing in common: a written investment policy and regular review periods. SMSF trustees tend to lack structure with life getting in the way from time to time, so setting aside an hour every quarter to review every aspect of your portfolio has growing importance. Doing so assists with determining when and if to rebalance between asset classes during periods of volatility.
- Risk tolerance: Risk profiling can at times be an unsophisticated tool, but in the best circumstances offer unique insights into your own investment and personal biases. Understanding your risk tolerance is key to ensuring SMSF trustees don’t make poor decisions during times of stress. Are you comfortable with large 20 to 30 per cent falls in your portfolio? Should you be holding 50 per cent in dividend paying shares? Or most importantly, how much risk do you actually need to take to generate the income you require?
- Asset allocation: This feeds into the asset allocation decision, which history and research has shown can add significantly more to returns than individual investment and stock selection. Asset allocation decisions are ultimately determined by your objective returns, the amount of capital you have and how comfortable you are with volatility. SMSFs trustees have traditionally preferred high dividend paying shares, yet with dividends cut in 2020, are these still appropriate? Could these be replaced with less volatile and popular credit strategies? Where do these fit within portfolios?
- Investment structure: Finally, is investment structure. SMSF trustees are spoilt for choice when it comes to the investments being made available, some good, some bad. It has never been easier to build a diversified portfolio through publicly available investments. But a regular result is that portfolios lack direction and become a mishmash of popular investments at any given time. Do you prefer the ease of implementation that comes with ETFs? Or the active management available in managed funds? Are LICs still appropriate? Is a barbell or core-satellite approach more suited to your objectives?
These and many other questions are central to delivering long-term returns. Concluding on the topic, Maroney reiterates”it is still important for SMSF trustees to ensure members are covered by a strategy that balances the objectives of maximising a member’s expected retirement income, managing the expected risks and providing flexibility to access capital required during retirement.
