SYDNEY: 3 JUNE 2013 - In a policy conversation dominated by considerations of efficiency and investment practicality, the implications of electing to exercise individual choice in retirement planning are often overlooked. What are the implications of setting up your own SMSF?  Certainly it offers the prospect of greater control and flexibility, but at a deeper level the conscious decision by an individual to operate in an environment outside APRA’s supervisory remit involves a fundamental philosophical shift in personal responsibility for that individual.

The concept of a “choice architecture” in superannuation was a centrepiece of the Cooper Review. In emphasising the value of choice, the report recognised that individuals who voluntarily elect to exercise discretion in their retirement planning accept that in doing so, they also take greater personal responsibility. By assuming control of their superannuation, SMSF members in particular must recognise that they take full responsibility for their financial security.

This has been highlighted by recent events. The benefits of individually managed super, including greater investment flexibility and tax incentives, are regularly espoused. These advantages have driven unprecedented growth in the sector, with the number of SMSFs rising by 27% in the past four years. However recent regulatory developments have provided a timely reminder of what it means to opt out of the APRA regulated system.

Most poignantly, the government's response to the collapse of Trio Capital provided a stark illustration of the fundamental risks associated with opting out of an APRA regulated fund. In Australia’s largest superannuation fraud, a total of $176 million was siphoned from Trio’s hedge fund investments. In April 2011, the Federal Government announced a $55 million financial assistance package to support affected superannuation funds. However, in accordance with Part 23 of the Superannuation Industry (Supervision) Act, financial assistance was only provided to APRA regulated superannuation funds. The direct investors in Trio, including 285 SMSFs, were not eligible for compensation. Not surprisingly, this outcome infuriated SMSF investors who argued that their predicament was precisely the same as the other superannuation fund members. However, the absence of an equivalent safety net for SMSFs is an unambiguous reflection of the philosophical distinction between individuals remaining part of an APRA fund and electing to manage their own superannuation. By choosing to take full responsibility for their retirement planning, SMSF members receive certain privileges; they are free to make their own choices. In making this conscious decision, they also waive their entitlement to certain support mechanisms.

In a recent presentation to the ASIC Annual Forum, Jeremy Cooper, eponymous Chair of the Cooper Review, staunchly defended the current trade off between individual choice and responsibility. Cooper openly recognised that SMSF members can theoretically lose their entire retirement savings, observing that in managing your own superannuation “you win your own wins, and you own your own losses.” In particular, Cooper argued that the lack of a broad statutory safety net is consistent with the essential philosophical point that society should not be required to cover SMSF losses.

The unique status of SMSFs was also reflected in the recommendations of two separate reports relating to investor protection. Both the Parliamentary Joint Committee (PJC) Inquiry and the Future of Financial Advice Report dealt with the governance issues that arose in the wake of Trio’s collapse. The most significant aspect of both reports was the rejection of a last resort compensation scheme for investors that do not have access to existing financial safeguards. The reports found that in order to protect investors, including SMSFs, priority should be given to a more rigorous approach to ensuring regulatory compliance. The PJC Inquiry did note the possibility of an “opt-In” insurance scheme to safeguard SMSFs against fraud and theft, however, this proposal was not included in the final recommendations. 

One of the most concerning findings of the PJC Inquiry was that many SMSF members were completely unaware that they were not protected by statutory safeguards relating to fraud and theft. More than anything, this reveals a systemic failure amongst SMSF members to properly appreciate what it means to opt out of the APRA regulated system and take personal responsibility for their own superannuation. In a relatively simplistic response, the inquiry recommended that that the ATO include a “clear, understandable, large print warning” on their website that SMSFs are not covered by the government safety net. It is uncertain whether this approach provides adequate recognition of the underlying philosophy of self-reliance that distinguishes SMSFs.

Ultimately, the value of individual choice is well recognised but it is easy to overlook the broader philosophical and practical implications of electing to engage in an SMSF. Recent events have reinforced the fact that by assuming control of their superannuation, members of an SMSF also accept full responsibility for their financial security in retirement. In the increasingly broad based shift towards SMSFs, it is essential that members do not lose sight of the trade off between the privileges and fundamental risks associated with self managed retirement saving.  They can swim outside the flags, and enjoy the freedom from oversight that that brings, but they do so at their own risk.